How do you record a customer refund and when would you use a Refund Receipt versus a Credit Memo?

• A. Use a Credit Memo to record a cash refund.
• B. Use a Refund Receipt to record cash or bank refunds; a Credit Memo reduces AR and can be used with an invoice.
• C. Use a Sales Receipt for refunds.
• D. Use a Refund Receipt to increase revenue.

Answer: (B)

When a customer is refunded, you’re balancing two things: the customer’s balance and the cash leaving your business. A Refund Receipt is the form you use to record the actual cash or bank refund to the customer. It captures the outflow of cash and provides a record of the refund.

If the refund is tied to an existing invoice or overpayment, you also use a Credit Memo to reduce what the customer owes (Accounts Receivable). The Credit Memo can be linked to the refund so the customer’s balance is correctly adjusted and you have a clear trail for the return.

A Sales Receipt is for taking payment on a sale, not for returning money to a customer, and a refund does not increase revenue. So the correct approach is to use a Refund Receipt to record the cash refund, and a Credit Memo to reduce AR as needed.