How to Handle Returns and Credit Memos in QuickBooks When You're on Accrual Sales Tax Basis
Summary:
If your business pays sales tax on an accrual basis (when invoices are created, not when they’re paid), handling client returns requires special care to stay compliant with your state’s tax rules. This guide walks you through the correct way to issue a credit for returned items in QuickBooks Online without altering past invoices, which could compromise your sales tax filings.
🚩 Why This Matters
If you're using accrual accounting for sales tax, altering a past invoice after a closed tax period can create inaccurate tax filings. Instead, you should issue a credit memo in the current month to reflect the return and apply it to the original invoice.
✅ Scenario:
Let’s say a client ordered five(5) blankets at $500 each. The total invoice (created April 10) included:
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Subtotal: $2,500
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Sales Tax: $168
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Total: $2,668.75
The client later decides they only need three (3) blankets.
🛑 Don’t Do This:
Do not edit the original April invoice after April has closed. Editing closed-period invoices can create incorrect sales tax filings.
✅ Do This Instead:
1. Create a Credit Memo in the Current Month
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Go to + New > Credit Memo
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Use the same customer
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Date the credit memo in the current month (e.g., May 21)
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Enter the returned item details (e.g., 2 blankets at $500 each)
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Mark the item as taxable
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Save the credit memo
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💡 This creates a credit of $1,067.50 ($1,000 + $67.50 tax)
2. Apply the Credit Memo to the Original Invoice
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Go to Sales > Customers
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Open the customer record
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Click on the original invoice
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Click Receive Payment
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Remove any sample or unrelated entries
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Apply the credit memo as the payment method (label it “Credit Memo” if you like)
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Overwrite the payment amount to match the credit (in this case, $1,067.50)
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Save and close
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🧾 What Happens Next
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The invoice is updated to show the new balance due
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The client’s outstanding balance is accurate
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Your May sales tax report reflects a reduction of $67.50 (the tax on the returned blankets)
April’s sales tax remains unchanged and compliant
This approach keeps your financials clean and your sales tax reporting accurate—two things that make your bookkeeper (and your state tax department) very happy.
❓Need Help?
If you’re unsure whether to edit an invoice or create a credit memo, schedule a quick call with our team. We're happy to walk you through the process.