To enter a vendor credit in QuickBooks Online, you use the “+ Create” button and select “Vendor credit” from the menu. The form works much like a bill in reverse: you pick the vendor, enter the credit amount with category or item details, and save. The credit then sits on that vendor’s account until you apply it to an open bill or record a refund deposit.
When to Use a Vendor Credit
A vendor credit is the right tool when a supplier owes you money but hasn’t sent a check or refund yet. Common scenarios include returning damaged goods, receiving a price adjustment after a bill was already entered, being overcharged on an invoice, or getting a volume discount applied retroactively. The credit reduces what you owe that vendor without recording any cash coming into your bank account.
If the vendor has already sent you a refund check or deposited money back to your account, you’ll still create the vendor credit first, then record a separate bank deposit to close it out. The vendor credit is the accounting entry; the deposit is the cash entry.
Step-by-Step: Creating the Vendor Credit
Open QuickBooks Online and follow these steps:
- Select “+ Create” from the top navigation bar (the green button with the plus sign).
- Select “Vendor credit” from the Vendors column in the dropdown menu.
- Choose the vendor from the Vendor dropdown. This must match the vendor on the original bill or expense so QuickBooks links the two correctly.
- Enter the date of the credit. Use the date on the vendor’s credit memo if they sent one, or the date the return or adjustment was agreed upon.
- Fill in the Category details or Item details. If the credit is for a service or general expense, use the Category section and select the same expense account that was on the original bill. If the credit involves inventory products you returned, use the Item details section and select the specific inventory item so QuickBooks adjusts your quantity on hand.
- Enter the amount. Break it across multiple lines if the credit covers more than one category or item.
- Add a memo with a brief note (like “Credit for returned supplies, invoice #4521”) so you can identify it later.
- Select “Save and close.”
Once saved, the credit appears in the vendor’s transaction history and reduces their outstanding balance.
Category Details vs. Item Details
The vendor credit form has two line-item sections, and which one you use matters for your reports.
Use the Category details section when the credit relates to a non-inventory expense: office supplies, a service fee, rent adjustments, utility overcharges, and similar costs. Select the same expense category that appeared on the original bill so the credit offsets the correct line on your profit and loss report.
Use the Item details section when you’re returning physical products that you track as inventory. Selecting the inventory item tells QuickBooks to reduce your inventory asset value and adjust the quantity on hand. If you skip this and use a generic expense category instead, your inventory counts will be off.
Applying the Credit to a Bill
A vendor credit sitting on its own doesn’t change what you actually pay. You need to apply it to an outstanding or future bill from that same vendor. Here’s how:
- Select “+ Create” again.
- Select “Pay bills.”
- Find and select the bill you want to pay from the list.
- Check the Credit Applied column. QuickBooks automatically detects available credits for that vendor and applies them to the selected bill. You’ll see the credit amount reflected in the “Credit Applied” field, which reduces the total payment due.
- Verify the amounts look correct, then select “Save and close.”
If the credit is larger than the bill, QuickBooks applies only the portion needed to zero out that bill. The remaining credit stays available for future bills from the same vendor.
Automatic vs. Manual Credit Application
QuickBooks Online has a setting that controls whether credits are applied to bills automatically. When the “Automatically apply credits” feature is turned on (which is the default), QuickBooks will suggest applying any open vendor credit whenever you go to pay a bill from that vendor. You can still adjust the amount manually before saving.
If this setting is turned off, existing credits won’t be applied to bills unless you manually link them. To check or change this, go to Settings (the gear icon), then Account and Settings, then the Advanced tab. Look for the “Automatically apply credits” option and toggle it on or off depending on your preference. Turning it on is simpler for most businesses, but if you want full control over which credits apply to which bills, turning it off lets you decide each time.
Recording a Vendor Refund Check
When a vendor sends you actual money back, whether as a check, ACH transfer, or credit card refund, you need two transactions: the vendor credit (which you already created using the steps above) and a bank deposit that clears the credit.
To record the deposit, select “+ Create” and then “Bank deposit.” Choose the bank account where the refund landed. In the deposit line, select the vendor’s name in the “Received from” column, then choose “Accounts Payable” as the account. QuickBooks will show the open vendor credit, and you can select it to link the deposit to the credit. Enter the amount, then save.
This two-step process keeps your accounts payable balance accurate and ensures the refund shows up in the correct bank account register. If you skip the vendor credit and just record a deposit, your vendor balance won’t update and your expense reports may be overstated.
Finding and Managing Open Credits
To see which vendor credits are still unapplied, run an Accounts Payable Aging report or a Vendor Balance Detail report. Go to Reports from the left navigation menu and search for either report by name. Open credits appear as negative amounts on the vendor’s balance. If a credit has been sitting for a while, it likely means you haven’t applied it to a bill yet, or the vendor hasn’t sent a new bill to apply it against.
You can also view a specific vendor’s credit history by going to Expenses, then Vendors, and selecting the vendor’s name. Their transaction list will show all bills, payments, and credits in one place, making it easy to spot anything that hasn’t been matched.