Key takeaways
What this article covers, in order:
- Why these four get muddled
- The quick reference
- Customer refunds
- Supplier refunds
- Chargebacks
- Reversed and returned payments
Refunds, chargebacks and reversals all undo something that happened earlier, so the rule of thumb is to record them against the original transaction, not as fresh income or a fresh expense. A refund you give a customer reduces your sales. A refund you get from a supplier reduces your costs. In chargeback accounting, the card provider takes money back (often with a fee on top), and it may later come back to you. A reversed or returned payment means the original never really happened. Each one needs a slightly different entry.
Why these four get muddled
Hannah sells handmade ceramics from a studio in York, both in person and online. In one month she:
- Refunded a customer £45.00 for a cracked mug
- Got £32.00 back from a glaze supplier who'd overcharged her
- Had a £180.00 card payment pulled back by a customer's bank, plus a £15.00 fee
- Had a £250.00 payment from a café customer bounce back two days later
On the bank statement, all four are just numbers moving the "wrong" way. If she categorises them the obvious way (money in = income, money out = expense), three of the four end up in the wrong place.
The quick reference
| What happened | Money | Where it goes | Common mistake |
|---|---|---|---|
| You refund a customer | Out | Reduces sales (or settles a credit note) | Recorded as an expense |
| A supplier refunds you | In | Reduces the original cost category | Recorded as income |
| Chargeback | Out | Reverses the sale; fee to bank/card charges | Fee ignored, or both lumped into one expense |
| Chargeback won (funds returned) | In | Reinstates the sale | Recorded as new income without reversing the first entry |
| Returned/bounced payment | Out (or in, if you're the payer) | Reverses the original receipt; the invoice is unpaid again | Left as a "fee" or ignored |
| Your own payment reversed | In | Reverses your payment; the bill is unpaid again | Recorded as income |
Customer refunds
When you refund a customer, you're giving back money you previously counted as a sale. So it should reduce your sales, not appear as a cost.
If you invoice, the tidy way is a credit note against the original invoice, then the refund payment settles the credit note. That keeps the customer's account straight and shows exactly what was refunded and why.
If you don't invoice (say, card sales at a market stall), record the refund in your sales category as a negative.
Hannah's cracked mug: £45.00 out of the bank, recorded against sales. Her sales for the month are £45.00 lower, which is right, because she didn't really earn it.
Supplier refunds
Money in from a supplier isn't income. It reduces the cost you recorded when you first paid them.
Hannah's glaze supplier refunds £32.00 because she was charged for a tub that never arrived. She records the £32.00 in her materials category (where the original purchase went), reducing materials costs. If she'd billed the purchase as a supplier bill, a supplier credit note against that bill is the cleanest route.
Why it matters: if the £32.00 goes to "Other income", her sales look slightly higher and her material costs stay slightly higher. Her profit is the same, but her margin on materials is wrong. And if this happens every month, it adds up.
Chargebacks
A chargeback is when a customer disputes a card payment with their bank, and the money is taken back from you through your card processor. You usually pay a fee whether you win or lose.
A chargeback has two parts, and they go to different places:
- The disputed amount reverses the sale.
- The fee is a cost, typically bank and card charges.
If you challenge the chargeback and win, the disputed amount comes back. The fee often doesn't.
Worked example: Hannah's chargeback
An online customer paid £180.00 for a set of bowls. They then disputed it, saying it never arrived. Hannah had proof of delivery and challenged it.
| Date | What happened | Bank | Sales | Card charges |
|---|---|---|---|---|
| 4 Sep 2026 | Customer pays for bowls | +£180.00 | +£180.00 | |
| 21 Sep 2026 | Chargeback | −£180.00 | −£180.00 | |
| 21 Sep 2026 | Chargeback fee | −£15.00 | £15.00 | |
| 12 Oct 2026 | Dispute won, funds returned | +£180.00 | +£180.00 | |
| Net effect | +£165.00 | +£180.00 | £15.00 |
Check: bank +£180.00 − £180.00 − £15.00 + £180.00 = +£165.00. Sales +£180.00 − £180.00 + £180.00 = +£180.00. And £180.00 of sales minus £15.00 of charges = £165.00, which matches the bank.
So after everything, Hannah made the sale and lost £15.00 to the fee. The books say exactly that.
Notice that the dispute straddled a month end. At 30 Sep 2026, the sale had been reversed and the fee charged, so for Sep 2026 Hannah's books show no sale and a £15.00 cost. That's correct at the time, because she didn't have the money. When the funds came back in Oct 2026, the sale was reinstated in that month.
Depending on your processor, the chargeback and fee might be deducted from a payout rather than taken from your bank separately. The principle is the same; you just need the processor's report to see the parts.
Reversed and returned payments
Sometimes a payment simply fails after it appears to have gone through. A customer's bank transfer might be recalled, or a direct debit you collect might be returned unpaid. In the UK, cheques that bounce work the same way, though fewer people pay by cheque now.
The key point: the original payment didn't stick, so the invoice it paid isn't paid any more.
Hannah's café customer paid £250.00 by bank transfer on 15 Sep 2026, and she marked their invoice as paid. On 17 Sep 2026 the bank returned it. Two entries:
- 15 Sep 2026: +£250.00, payment against the invoice.
- 17 Sep 2026: −£250.00, reversal of that payment.
The invoice goes back to unpaid, and it'll show up on her aged debtors list again, which is exactly what she wants so she can chase it.
If your own payment to a supplier is returned, it's the mirror image: the money comes back in, and the supplier bill becomes unpaid again. It isn't income.
A short checklist when money moves backwards
- [ ] Find the original transaction this one is undoing
- [ ] Put the reversal in the same category (or against the same invoice or bill)
- [ ] Separate any fee into bank and card charges
- [ ] Check whether an invoice or bill should now show as unpaid
- [ ] If a dispute is still open at month end, note it so you remember to look for the outcome
- [ ] Reconcile; the reversed items should pair up neatly against the originals
How HelloBooks helps
In HelloBooks, refunds and reversals come into the review list from your bank feed (connect your bank through Open Banking, most UK banks and cards) or a CSV statement import, where you confirm or change the category so they land against the original category rather than as new income or costs.
You can raise invoices, bills and quotes, and the debtors and creditors ageing reports show which invoices and bills are still unpaid, so a bounced payment shows up when you chase. At month end, the reconcile screen suggests a match for each statement line with a confidence score and the reason for the match, and you can unmatch in one click if a refund gets paired with the wrong item. See invoice software and bank reconciliation software. If you sell online, the e-commerce sellers page is worth a look too.
FAQs
Is a refund to a customer an expense?
No. It reduces your sales, ideally through a credit note against the original invoice.
Is a refund from a supplier income?
No. It reduces the original cost. Put it back in the category the purchase went to, or use a supplier credit note.
How do I record a chargeback fee?
Separately from the disputed amount, usually as bank and card charges. The disputed amount reverses the original sale.
What if I win a chargeback dispute?
Record the returned funds as reinstating the sale. Don't treat it as brand new income without the earlier reversal, or you'll count the sale twice.
What happens to an invoice when the customer's payment bounces?
Record the reversal against the original payment, so the invoice shows as unpaid again and you can chase it.
Backwards money is just forwards money undone; find what it's undoing and the right entry nearly always follows.
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