How to Reconcile a Refund in Xero

Overview

Reconciling a refund in Xero always involves two parts: the accounting entry (a credit note or overpayment) and the bank transaction (the actual money moving). Reconciliation is the step that connects them.

There are two scenarios this tutorial covers:

• Supplier refund — a supplier returns money to you (e.g. you overpaid a bill, or returned goods).
• Customer refund — you return money to a customer (e.g. they returned goods or were overcharged).

Both follow the same logic: the credit note must exist first, then you reconcile the bank transaction to it using Find & Match.

---

---

Before you start

Important: You can only reconcile a refund once a credit note, overpayment, or prepayment exists in Xero and is in Awaiting Payment status. If the money appears in your bank feed but no credit note exists, create one first — otherwise Find & Match won't surface the refund as a match option.

---

Part 1 — Reconcile a supplier refund

A supplier refund occurs when a supplier returns money to you. Common causes: you overpaid a bill, returned faulty goods, or received a pricing adjustment.

Step 1: Confirm the credit note exists on the bill

Go to Accounts → Bills to Pay → Awaiting Payment and open the relevant bill. Scroll down and check the Credit section. If no credit note is listed, create one:

1. Open the bill
2. Click Add Credit Note
3. Enter the amount, date, and account code
4. Click Save

The credit note now appears in the Awaiting Payment tab.

Step 2: Apply the refund

Open the credit note. Scroll to the Refund section at the bottom and fill in:

• Amount — the amount being refunded (can be partial)
• Date — match the date on your bank statement
• Bank account — the account the refund will be deposited into

Click Add Refund.

Xero records the refund. If the full amount is refunded, the credit note moves to Paid. If partial, it stays in Awaiting Payment for the remaining balance.

Step 3: Open bank reconciliation

Go to Accounting → Bank accounts. On the account where the refund will arrive, click the blue Reconcile button.

Step 4: Find & Match the refund

Find the incoming bank transaction for the refund amount. Click Find & Match next to it.

In the list, look for the entry labelled Supplier Refund with the corresponding credit note reference. Tick the checkbox next to it.

Tip: If the refund doesn't appear, the date range in Find & Match may be too narrow — Xero defaults to 30 days either side of the statement line date. Click the date range fields and widen the search.

Step 5: Reconcile

Click Reconcile. Xero matches the bank deposit to the supplier refund and clears the transaction from the reconciliation screen.

---

Part 2 — Reconcile a customer refund

A customer refund occurs when you return money to a customer — after issuing a credit note for returned goods, cancelling a service, or correcting a billing error.

Step 1: Confirm the credit note exists on the invoice

Go to Sales → Invoices → Awaiting Payment and open the relevant invoice. Confirm a credit note is attached. If not, create one:

1. Open the invoice
2. Click Add Credit Note (or raise a standalone credit note and allocate it to the invoice)
3. Save

Step 2: Process the refund payment

Open the credit note. In the Refund section:

1. Enter the Amount being refunded to the customer
2. Set the Date to match when the payment left your bank account
3. Select the Bank account the refund was paid from
4. Click Add Refund

Xero records the outgoing payment and marks the credit note as Paid (if fully refunded).

Step 3: Reconcile in the bank feed

Go to Accounting → Bank accounts and open the account the refund was paid from. Find the outgoing transaction in your bank feed. Click Find & Match.

The customer refund appears in the list. Tick it and click Reconcile.

---

Partial refunds

Partial refunds work the same way — enter only the amount being refunded in the Add Refund form. The credit note stays in Awaiting Payment for the remaining balance. You can reconcile further refunds against it later, or apply the remaining credit to another invoice.

---

What if the refund is in the bank feed but no credit note exists?

This is the most common problem. The fix:

1. Create the credit note on the original bill or invoice
2. Apply the refund via Add Refund (this records the expected bank movement in Xero)
3. Return to the bank reconciliation screen and use Find & Match

Don't use the Create tab to categorise the bank line directly — this records a standalone transaction rather than matching to the credit note, and results in a duplicate entry that will need to be reversed later.

---

Frequently asked questions

Why can't I see the refund in Find & Match?

Three things to check: the credit note doesn't exist yet, it's not in Awaiting Payment status, or the date range in Find & Match is too narrow. Widen the date range first — if it still doesn't appear, check the credit note status.

Does the refund amount need to exactly match the credit note amount?

For a full refund, yes. For a partial refund, enter the exact amount being refunded — Xero applies it to the credit note and leaves the remaining balance outstanding.

Can I reconcile a refund that arrived as part of a larger deposit?

Yes. If the refund came in the same bank transaction as other payments, use Find & Match to select multiple lines and split the bank transaction across the refund and any invoices.

What if the refund payment was returned or bounced back?

A returned refund (where the money comes back to you because the customer's account is closed, for example) is a different scenario. See How to reconcile a returned payment in Xero.

My customer's credit is sitting in Awaiting Payment — can I apply it to a new invoice instead of refunding?

Yes. Open the new invoice and click Add Credit to apply the existing credit note against it. No bank transaction is involved, so there's nothing to reconcile.

How does Remittance Go help when a remittance includes a credit line?

If a customer sends a remittance advice that includes a credit alongside invoice payments, Remittance Go reads the PDF, flags the credit line separately, and ensures it isn't misapplied as a payment against the wrong invoice.