Three tools, three jobs
Money arrived that shouldn't have, or shouldn't stay. Your instinct is to 'fix it' - but there are three different fixes, and they mean three different things to your books, your taxes, and your customer.
| Customer credit | Refund | Reversal | |
|---|---|---|---|
| Money leaves the business? | No | Yes | No |
| Customer keeps value with you? | Yes - a wallet | No | No |
| Books say the event happened? | Yes | Yes | Yes - and its undo |
| Typical trigger | Overpayment, advance, goodwill | Return + customer wants cash | Bounced payment, wrong entry |
| Ledger | Cr Customer Advances | Dr Advances / Cr Bank | Opposite of the original entry |
The decision at a glance
Customer credit: the wallet
When a customer overpays or pays in advance, the excess is their money sitting with you - a liability in your books, a wallet in theirs. Don't refund it reflexively: applied to their next invoice, it's frictionless for both sides, and it keeps the relationship (and the cash) with you.
The ₹2,000 that came back as loyalty
A customer returns goods worth ₹2,000 from a paid invoice. Issue a credit note, keep it as customer credit, and their next order arrives ₹2,000 cheaper without anyone touching a bank transfer. B2B customers in particular expect exactly this.
Refunds: money actually leaves
A refund is a payment out - real cash, real bank movement, drawn against the customer's credit. Because money leaves the business, refunds deserve friction: a method, a reference, an approver. A credit note changes the accounting; a refund moves the money. They are different events and both get recorded.
Reversals: this should never have happened
A payment was recorded that never cleared. An invoice went to the wrong customer. The amateur move is deleting it - which silently falsifies history and breaks every report that ever included it. The correct move is a reversal: post the exact opposite entry, link it to the original, state the reason. The mistake and its correction both stay in the books, forever.
Never delete
If a financial record was wrong, the record OF ITS CORRECTION is what proves your integrity. Deletion is indistinguishable from fraud - to an auditor, and eventually to you.
A customer demands a cash refund but paid by card - what now?
Refund by the original method wherever possible; it's cleaner for disputes and often required by card network rules. Record the method and reference either way.
Can credit expire?
Legally it varies by jurisdiction; practically, set a policy (say 12 months, with a reminder at 10) and write it into your terms. Expired credit is usually recognized as income - ask your accountant.
Reversal vs. credit note - which fixes a wrong invoice?
If the invoice never should have existed: void/reverse it. If the invoice was right but the situation changed (returns, discounts after the fact): credit note. 'Happened, here's the fix' vs 'never happened'.
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