How to reconcile a refund paid in Xero
A common question from newer Xero users is how to reconcile where an invoice is issued and payment received and reconciled – then at a later date a credit is issued on the invoice and a refund made. The confusion arises because a credit cannot be added to a paid invoice, so if a new credit is raised it cannot be allocated to the invoice it belongs to.
Raising a new credit note and then refunding it is an option - but this will not connect to the original invoice which will continue to show as the full amount paid.
How to reconcile the refund
- Remove the full payment from the original invoice it was reconciled to.
Do this by searching for the invoice, then scroll down and you will see the Payment showing in blue. Click on the blue which will take you to the Payment transaction. Then use the top right Options button and choose Remove and Redo. This will remove and delete the Payment transaction as if you hadn’t reconciled it.
2. Add the credit to the invoice. Find the invoice again, then use the Invoice Options button top right.
3. Reconcile the full Payment again but this time in two parts –
First find and match to the invoice - for the remaining amount still outstanding now the credit has been applied
Second, scroll down and add a Receive Money transaction for the remaining amount (the amount of the credit). This can be coded to Sales, a Suspense account or another account as preferred.
4. Reconcile the Refund as a Spend Money transaction using the same account as the Receive Money – Sales, a Suspense account or another account as was used. This will cancel out the Receive Money transaction.
You now have a credited Invoice with payment applied for the lesser amount. You have receive and spend money transactions which cancel each other out – like an error payment coming in, and then being refunded.