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Refunding money for returned merchandise

Adapted from the Exact Macola® technical note "How to Refund Money for Returned Merchandise" (document 00.678.322, Progression 7.x, Accounts Receivable). The methods below are guidance rather than the only way to do it — any method that gives every subledger and the general ledger the right information will do.

There is no way to pay cash out of A/R. Every cash payment in Macola® happens in A/P, or through manual journal entries in G/L when A/P is not in use. So refunding a customer is always two jobs: net the cash — and where necessary the invoice — out of A/R, then process the refund itself. Everything below assumes A/P is in use.

Without Order Entry

The case: a cash deposit was taken for an order to be billed later. There is usually a cash receipt applied to 0 — open credit — for the customer, and an invoice may or may not have been processed.

  1. In A/R, process a check reversal for the cash receipt. This removes everything relating to the cash receipt from A/R and creates the reversing entries for the general ledger.
  2. Then, depending on the case:
    • No invoice was processed — nothing further is needed in A/R.
    • An invoice was processed and the customer will not complete the purchase — process a credit memo to net the invoice to 0.00.
    • An invoice was processed and the customer will complete the purchase, paying later — nothing further is needed in A/R.
  3. In A/P, process a voucher and issue a check to the customer.

With Order Entry

Order Entry involvement means inventory items were part of the sale. The refund might be for an O type order including a cash deposit that is being cancelled with nothing shipped; for an order that has been billed and shipped with a deposit and still has a balance due; or for an order paid in full some time ago that now involves a return.

  1. In A/R, process a check reversal to clear the cash information out of A/R. This creates the reversing entries for the G/L accounts the original cash receipt hit.
  2. Then, depending on the case:
    • An invoice was processed, the customer intends to complete the sale, and more inventory will be shipped — do only what is needed to pick and ship the inventory, referencing the invoice already processed.
    • The customer is not completing the sale — process a credit memo to net the invoice, plus whatever transactions in O/E and I/M properly reflect the return of the inventory items.
    • No invoice was processed against the order — do whatever is needed to cancel the order, or to bill it later against re-shipped inventory.
  3. In A/P, process a voucher and issue a check to the customer.

Choosing the A/P route

A customer is not usually also a vendor, so there is normally no vendor record to pay against. Three options, in rough order of how often they fit:

Situation Approach
An isolated refund Process the transaction as a miscellaneous vendor — either a normal voucher selected for payment in the usual payment run, or a prepaid voucher that processes an immediate check
The customer refunds regularly Set them up as a vendor
A/P is not in use, or the check is hand-written Write the check and process journal entries to hit the proper G/L accounts, bypassing A/P

The reversal has to come first

Reversing the cash receipt is what creates the G/L reversing entries. Issue the refund check without it and the cash sits in A/R as an open credit against the customer forever, while the bank balance has already moved.

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