Key takeaways
What this article covers, in order:
- Four kinds of money coming back
- Customer refunds
- Supplier refunds
- Chargebacks
- Bank reversals
- A quick decision checklist
A refund, a chargeback and a reversal all send money back the way it came, but they're recorded differently. A customer refund reduces your sales, a supplier refund reduces your expenses, a chargeback reverses a card sale (often with a fee on top), and a bank reversal undoes a transaction that should never have gone through. The common mistake when working out how to record a refund in accounting is coding money coming back in as new income. It almost never is.
Four kinds of money coming back
| Event | Who started it | Recorded against | Common mistake |
|---|---|---|---|
| Customer refund | You, after a customer asked | The original sale (credit note or reduced sales) | Coded as a general expense |
| Supplier refund | The supplier | The original expense or bill (supplier credit note) | Coded as income |
| Chargeback | The customer's card issuer | The original sale, plus a fee expense | Ignored, so the invoice still shows as paid |
| Bank reversal | The bank | The original transaction | Both legs left in, or one deleted |
Let's walk through each with numbers.
Customer refunds
Grace runs a homewares shop in Launceston. On 3 Sep 2026 a customer bought a $660.00 lamp (GST inclusive) and paid by card. On 10 Sep 2026 the customer returned it and Grace refunded $660.00.
The bookkeeping idea: the sale didn't really happen, so sales should go back down.
- If she raised an invoice for the sale, she issues a credit note for $660.00 against that customer and applies the refund payment to it.
- If the sale was recorded straight from the bank as income, the refund line from the bank is coded to the same sales account with the same GST code, as money out. It reduces sales for the period.
What she shouldn't do is code the $660.00 refund to "Refunds" under expenses. Her profit ends up the same, but sales are overstated by $660.00 and so are expenses. Over a year of returns, her sales figure stops meaning anything.
Partial refunds
Same lamp, but the customer keeps it with a scratch and Grace refunds $110.00. That's a $110.00 credit note against the original invoice. The invoice is now worth $550.00 net. Check: $660.00 minus $110.00 = $550.00.
Supplier refunds
Grace overpaid a freight supplier. The bill was $418.00 but she paid $481.00, swapping two digits. The supplier refunds $63.00 on 22 Sep 2026. Check: $481.00 minus $418.00 = $63.00.
That $63.00 isn't income. It's her own money coming back. The cleanest way to record it depends on how the payment was set up:
- If the $481.00 was matched to the $418.00 bill, the extra $63.00 sat as a supplier overpayment or credit. The refund is matched against that credit.
- If the $481.00 was coded straight to Freight, the $63.00 refund is coded to Freight too, as money in. Freight for the month ends up at the correct $418.00.
The same idea applies when a supplier sends a credit note for faulty goods. Record the credit note against the supplier, and match the refund (or the reduced next payment) to it. Keep the GST code consistent with the original purchase.
Chargebacks
A chargeback is different from a refund because you didn't choose it. The customer disputed a card payment with their bank, and the money is taken back from you. There's often a dispute or chargeback fee as well, depending on your payment provider.
Say Grace sold a $480.00 rug online on 5 Sep 2026. On 28 Sep 2026 the customer's bank reverses the payment. Her provider takes back $480.00 and charges a $25.00 chargeback fee. That's $505.00 gone. Check: $480.00 + $25.00 = $505.00.
In the books:
- $480.00 goes against the original sale. If there was an invoice, the invoice is no longer paid; the customer now owes it again, or you write it off if you won't recover it.
- $25.00 goes to bank fees or merchant fees, as an expense.
If Grace later wins the dispute and the $480.00 comes back, she records it as the customer paying the invoice again. The $25.00 fee may or may not be returned, depending on the provider.
If you're still waiting on the outcome, keep notes on the invoice so whoever does month-end knows what's going on.
Bank reversals
A reversal is the bank undoing something: a direct debit that was dishonoured, a payment sent to the wrong BSB and bounced back, or a duplicate charge the bank fixed. You'll usually see two lines on the statement: the original and the reversal, for the same amount in opposite directions.
On 15 Sep 2026 Grace's $1,200.00 rent direct debit was dishonoured because funds hadn't cleared. The statement shows:
- 15 Sep 2026: Rent direct debit, minus $1,200.00
- 15 Sep 2026: Reversal, plus $1,200.00
- 15 Sep 2026: Dishonour fee, minus $15.00
The rent was never paid. If she coded the first line to Rent, she codes the reversal to Rent too, so the net rent for that line is zero. The dishonour fee goes to bank fees. When she pays the rent properly on 17 Sep 2026, that payment is the real rent expense. Net bank movement across those three lines plus the 17 Sep 2026 payment: minus $1,215.00 ($1,200.00 rent paid on 17 Sep 2026 plus the $15.00 fee).
Don't delete both lines thinking they cancel. They're on the bank statement, so they belong in your books. Deleting them makes your reconciliation harder, not easier.
A quick decision checklist
When money comes back into the account, ask:
- [ ] Did a customer get their money back? Credit note or reduce sales.
- [ ] Did a supplier return money? Credit against the bill, or reduce the original expense.
- [ ] Did a card issuer take money back? Chargeback: reopen the sale, record any fee.
- [ ] Did the bank undo a transaction? Reversal: code it the same way as the original line.
- [ ] Is there a fee attached? Code it to bank or merchant fees.
- [ ] Is the GST code the same as the original transaction?
How HelloBooks helps
HelloBooks lets you raise invoices and bills, and the AR and AP ageing reports show which customers and suppliers still have open balances, which helps when a chargeback reopens an invoice. Refunds and reversals come in through your bank feeds or CSV imports and land in a review list where you confirm or change the category. When you reconcile, the reconcile screen puts an AI match suggestion on each statement line with a confidence score and the reason for it, and you can unmatch in one click if a refund was paired with the wrong item. More on invoicing and bank reconciliation.
FAQs
Is a customer refund an expense?
No. It reduces your sales. Coding refunds as an expense makes both your sales and your expenses look bigger than they are.
How do I record a supplier refund?
Against the original bill or expense, usually as a supplier credit. It reduces what you spent; it isn't income.
What's the difference between a chargeback and a refund?
You choose to give a refund. A chargeback is forced by the customer's card issuer after a dispute, and often comes with a fee.
What GST code do I use on a refund?
The same one used on the original transaction, so the GST is reversed correctly. Your BAS agent or accountant takes it from there.
Should I delete a transaction and its reversal?
No. Both appear on your bank statement, so both should be in your books. Code them so they net to zero, and record any fee separately.
What if I never get chargeback money back?
Once you're sure it's gone, the unpaid invoice is usually written off as a bad debt. Check the treatment with your accountant if the amount is large.
Money coming back nearly always belongs to the transaction it came from. Find that original line, and the rest follows.
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