Key takeaways
What this article covers, in order:
- Four "money back" moments in one week
- The quick reference
- Customer refunds: giving money back
- Vendor refunds: getting money back
- Chargebacks: the refund you didn't choose
- Bank reversals and voids
A refund you give a customer reduces your revenue (usually through a "Refunds" or "Sales returns" account). A refund you get from a vendor reduces the expense you originally recorded. A chargeback is a forced customer refund, often with a fee on top, and a reversal is a transaction the bank undoes. None of these is new income or a new expense on its own, and treating them that way is what makes P&Ls look strange.
Four "money back" moments in one week
Here's an illustrative week for Hannah, who sells hand-thrown pottery online and at markets from a small studio in Portland, Maine.
- Monday: A customer's $120 vase arrived cracked. Hannah refunds the full $120 to their card.
- Tuesday: Her glaze supplier credits $64.50 back to her business card for a short shipment.
- Thursday: A $210 order from Aug 2026 comes back as a chargeback. The customer told their bank they never got it. Hannah's processor pulls the $210 plus a $15 dispute fee.
- Friday: A $38.00 software charge from Wednesday disappears from her bank account. The vendor double-billed and reversed it.
Four lines in her bank feed that all look like "money moving the wrong way." Each one gets recorded a little differently.
The quick reference
| Situation | Bank shows | Record it as | Effect on P&L |
|---|---|---|---|
| You refund a customer | Money out | Debit Refunds/Sales returns (contra revenue), or reduce the customer's invoice with a credit note | Lowers revenue |
| A vendor refunds you | Money in | Credit the original expense category | Lowers that expense |
| Chargeback against you | Money out (sale amount + fee) | Sale amount to Refunds/Chargebacks (contra revenue); fee to Merchant fees | Lowers revenue, raises fees |
| Chargeback reversed in your favor | Money in | Reverse the chargeback entry (fee may or may not come back) | Restores revenue |
| Bank reverses a charge or deposit | Money in or out, matching the original | Match against the original; often net to zero | Usually none, if handled as a pair |
Customer refunds: giving money back
When Hannah refunds the $120 vase, she didn't "spend" $120 on anything. She un-earned a sale. So it shouldn't go into an expense category like "Supplies" or "Miscellaneous."
Two clean ways to handle it:
Use a contra-revenue account. Many small businesses keep an income-type account called "Refunds" or "Sales returns and allowances." It sits on the P&L under revenue and reduces it. The upside: you can see your gross sales and your refunds separately, which tells you whether returns are creeping up.
Use a credit note against the invoice. If the sale was invoiced, issue a credit note (sometimes called a credit memo) to the customer, then record the refund payment against it. This keeps the customer's account and your AR aging accurate.
What about the item itself? If the vase is broken and gone, there's nothing to bring back into stock. If a customer returns a resellable item and you track inventory, it goes back into inventory too. That inventory side varies by setup, so it's a good thing to confirm with a bookkeeper if you're unsure.
Vendor refunds: getting money back
The glaze supplier credits $64.50 to Hannah's card. The tempting move is to call that "Other income." Don't.
It's a reduction of what she spent on materials. Categorize the $64.50 credit to the same category as the original purchase, in this case Materials. Her Materials total drops by $64.50, which is exactly right, because she only really spent the net amount.
Why it matters: if refunds land in "Other income," your revenue is overstated and your materials cost is overstated. Profit nets out the same, but both lines are wrong, and your cost per piece looks worse than it really is.
If you recorded a bill for the original purchase and hadn't paid it yet, a vendor credit applied to that bill is the cleaner route.
Chargebacks: the refund you didn't choose
A chargeback happens when a customer disputes a card payment with their bank and the money is pulled back from you. There's usually a dispute fee as well.
For Hannah's $210 chargeback with a $15 fee:
- $210 goes to Refunds (or a separate "Chargebacks" contra-revenue account, if you want to track them apart).
- $15 goes to Merchant fees or Bank fees.
If the sale was invoiced and still shows as paid, you'd also want the customer's record to reflect that the payment was reversed.
If you win the dispute, the processor returns the $210 and sometimes the fee. Record the returned money against the same accounts you used, so the chargeback nets out. If the fee isn't returned, it stays as an expense.
Some businesses with frequent disputes keep a separate Chargebacks account so they can see the pattern. If you're seeing many, that's a business problem worth more attention than any bookkeeping fix.
Bank reversals and voids
The disappearing $38.00 software charge is a reversal. The vendor charged it, then undid it. Depending on timing, your feed might show:
- Both lines: $38.00 out on Wednesday, $38.00 in on Friday. Categorize both to the same category (Software), so they cancel out. Or, if your software lets you, exclude both as a matched pair.
- Neither line: If the charge never posted and only sat as pending, it may never appear in your feed. Nothing to record.
- Just one line: If you see the charge but not the reversal yet, leave it alone for a few days. The reversal is probably still coming.
Other reversals you'll see:
- Returned deposits (bounced checks). A customer's $500 check deposits, then comes back. Reverse the payment so the invoice is open again, and record any returned-item fee as a bank fee.
- Reversed ACH payments. Same idea: whatever the original entry did, undo it, and the customer or vendor balance goes back to where it was.
- Bank error corrections. The bank fixes its own mistake. Match the correction to the error so the pair nets to zero.
Cross-month refunds
Refunds don't care about your month-end. A sale in Sep 2026 refunded in Oct 2026 will reduce revenue for Oct 2026, not Sep 2026. That's fine and normal. Don't go back and edit the closed Sep 2026 period; record the refund in the month it happened.
If you keep accrual books and refunds are large or frequent, your bookkeeper or CPA may suggest estimating them. For most small businesses, recording each refund when it happens is enough.
A refund and reversal checklist for month-end
- [ ] Every customer refund is in Refunds/Sales returns or applied via a credit note, not in an expense category.
- [ ] Every vendor refund reduces the original expense category, not Other income.
- [ ] Chargebacks are split: sale amount to Refunds/Chargebacks, fee to Merchant fees.
- [ ] Won disputes are recorded back against the same accounts.
- [ ] Reversed charges and their reversals are categorized as a pair.
- [ ] Bounced customer payments have reopened the invoice.
- [ ] The Other income account has nothing in it that's really a refund.
How HelloBooks helps
HelloBooks brings in transactions through a live bank feed (connect most US banks and credit cards) or CSV statement import, so refunds, chargebacks and reversals show up next to the original charges where you can categorize them properly.
- Create invoices, bills and quotes on every plan, including Free ($0, no credit card), and keep AR and AP aging accurate as payments come and go.
- P&L, Balance Sheet and Cash Flow reports help you see whether refunds are landing where they should.
- Starter ($14.99/month) adds AI auto-categorization to speed through routine lines, leaving you to check the refunds and reversals by hand.
See more under invoice software and online invoice payments. If you sell handmade goods online, accounting software for Etsy sellers may be a good fit.
FAQs
Is a customer refund an expense?
No. A refund reduces revenue. Record it in a contra-revenue account like Refunds or Sales returns, or as a credit note against the original invoice.
Where do I record a refund from a vendor?
In the same expense category as the original purchase. That lowers the expense to what you actually spent. Recording it as income overstates both revenue and costs.
How do I record a chargeback fee?
Separately from the chargeback itself. The disputed sale amount reduces revenue; the fee goes to Merchant fees or Bank fees as an expense.
What if a refund happens in a different month than the sale?
Record the refund in the month it happens. Don't reopen a closed month to edit the original sale.
Should reversed bank charges be deleted?
Generally no. If both the charge and the reversal appear in your feed, categorize them to the same account so they cancel out. That keeps your books matching the bank statement line for line.
Money flowing backwards is just the original transaction in reverse. Record it against the same place, and your numbers stay honest.
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