Reading a vendor credit or refund

4 min read

When a review finds an overcharge, the vendor usually answers with a credit memo or a refund. They look alike on a quick read but behave differently. This article shows how to read each one and what to check before you close the item.

Credit and refund in plain terms

A credit memo is a vendor document that lowers what you owe. It is applied against current or future invoices, so no cash moves. A refund returns actual cash to you. Vendors issue credits for returns, shortages, pricing errors and rebates.

The difference matters. A credit helps only if you keep buying from that vendor and someone applies it. A refund helps at once but may take longer to arrange.

What a credit memo should show

Look for these items on the document:

  • The vendor name and your account.
  • A credit number and date.
  • The invoice or period it relates to.
  • A reason, such as pricing error or return.
  • The amount, shown clearly as a reduction.
  • Any tax treatment shown on the document. [VERIFY: how credits affect tax you already paid or reported]

If a reason is missing, ask for it. Without it you cannot link the credit to the finding that caused it.

Steps to take when a credit arrives

  1. Match the credit to the finding. Which invoice lines does it correct?
  2. Check the amount against your calculation. If it is lower, ask why in writing.
  3. Enter it in your system on the day it arrives. One accounts payable guide notes that credits left unentered are the ones most likely to go unused.
  4. Apply it to the specific invoice it corrects, or to the vendor account if it is a general credit such as a rebate.
  5. Confirm the next payment run actually netted it. Systems differ, and some need manual application.
  6. Record the result in your review file.

Steps to take when a refund arrives

  1. Match the payment to the finding and the amount you asked for.
  2. Confirm it was received in the right bank account.
  3. Record it against the vendor and the original invoices.
  4. Check that no matching credit was also issued, which would double the correction.
  5. Tell your partner firm and update the review log.

Your accountant decides how each is booked. [VERIFY: accounting treatment of vendor credits and refunds in your reporting framework]

Watch for a re-bill after a credit

A vendor sometimes issues a credit and then bills the full amount again. Link the original invoice, the credit and the new invoice together, then confirm the net amount is what you owe. A full re-bill after a credit can be a duplicate payment in waiting.

Old credits you still hold

Review open credits by vendor and age on a regular schedule. Large or old balances are worth confirming with the vendor, since a vendor may not honor an old credit forever. Check your contract for any expiry on credits. The practice fits into the rhythm in how often to review your costs.

Ask the right question of the firm

Fee arrangements may treat credits and cash differently. Ask the partner firm how a credit counts toward any fee and when the fee falls due. [CONFIRM: a partner firm supplies its treatment of credits for fee purposes] Fairview does not set these terms. See contingency fee versus flat fee for more on fee models.

Common mistakes

  • Treating a credit as cash received.
  • Letting a credit sit unapplied until it expires or is forgotten.
  • Applying a credit to the wrong vendor account.
  • Not noticing a vendor netted the credit against a different dispute.
  • Closing a finding before the credit or refund has landed.

Where this fits

Credits and refunds are the last visible step of a correction. For how errors are found, see what a recovery audit can and cannot find and accounts payable audit.

Find out what you are overpaying.

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