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Refunds and chargebacks in your books: how to record them

A refund looks simple at the bank, but it touches your sales, your HST and sometimes your inventory. A chargeback adds a bank-imposed reversal and often a fee. Entered carelessly, these items either vanish into the sales figure or get counted twice. This article explains how to record a refund, return or chargeback so the books still tell the truth, how the GST/HST adjustment works through a credit note, and which records to keep. It assumes you already record sales; it is not about reconciling the deposit itself.

Sora Accounting & Tax · General information · Editorial policy
Updated · 5 min read

A refund runs from the sale to the credit note and the return

A refund reverses part of a sale; record it separately, issue a credit note and adjust the HST in the period of the note.

Visual labels: Original sale; Refund or chargeback; Credit note; HST adjustment.

What to take away

  • Record a refund as its own entry that reduces sales, rather than deleting or editing the original sale.
  • To recover the HST on a refund, issue a credit note and report the adjustment in the period you issue it; the time limit is four years.
  • A chargeback is a reversal you did not initiate, so record it when it happens and keep the evidence you submitted.

Refund, return and chargeback are different events

A refund returns money to a customer, usually because you agreed to. A return is the customer sending goods back, which may or may not lead to a refund and may put stock back on the shelf. A chargeback is different: the customer’s card issuer pulls the money back through the payment network, often after a dispute you may contest.

The distinction matters because each leaves different evidence and different consequences. You control a refund. You only respond to a chargeback. Treat them as separate transaction types in your books, with their own accounts or at least their own labels, so you can see how often each occurs.

Keep the original sale and add a reversing entry

The cleanest habit is to leave the original sale untouched and record the refund as a separate entry that reduces revenue. Many bookkeepers use a sales returns and refunds account that sits directly beneath sales. Your gross sales stay visible, the refunds are visible, and net sales fall out of the difference.

Deleting the original sale hides activity and makes it hard to match your records to a processor report later. It also leaves no trail if the customer disputes the refund. If your software offers a credit memo or refund receipt linked to the original invoice, use that feature instead of a manual journal entry.

What happens to the HST

For GST/HST registrants, a refund of the price can also be a refund of the tax. The CRA’s guide says you can adjust, refund or credit the GST/HST you charged, but you need a credit note from you, or a debit note from the customer, to support it. If you refund only part of the price, you refund the same share of the tax. For example, if you keep a 15% restocking charge and refund 85%, you refund 85% of the HST you collected.

You then deduct the adjusted tax when working out your net tax for the reporting period in which the credit note was issued, as long as that tax was included in your net tax earlier. On the return it goes in the adjustments line. You have four years from the end of the reporting period in which you reduced the price to make the adjustment. A customer who claimed an input tax credit on the sale must add that tax back.

An illustrative example

Suppose you sell a product for $100 plus $13 HST, at Ontario’s 13% rate, and the customer returns it the following month for a full refund. The numbers are illustrative only. You record a $100 reduction in revenue, a $13 reduction in HST payable and $113 leaving the bank. The credit note shows $100 and $13 separately.

If you refunded only $100 and told the customer to keep the HST, the books would look different. That route is allowed in some cases, for example when a registered customer has already claimed the credit and you have already remitted the tax. In that case you refund the price without the tax and neither side makes an adjustment. Decide before you issue the refund, and document the choice on the paperwork.

Recording a chargeback

Record a chargeback when the bank or processor actually takes the funds back, not when you first learn of the dispute. Many processors also add a separate dispute fee. Record the fee as a bank or processing cost, and the reversed amount as a reduction of sales, the same way as a refund. If you win the dispute and the money returns, record the recovery as its own entry and reverse the fee only if it is actually given back.

Be careful with HST. A chargeback is not a credit note you chose to issue, so confirm with your accountant whether an adjustment is appropriate in your circumstances rather than assuming the answer is the same as for a voluntary refund. Timelines and evidence rules for disputes differ between processors, so read your merchant agreement.

Returns, restocking and inventory

If you hold stock, a returned item raises a second question: can you resell it? A sellable return goes back into inventory at its cost. A damaged item that cannot be sold is a loss, recorded as a cost rather than quietly leaving inventory unchanged. A restocking charge you keep is revenue, and the HST on it stays collected.

For a service business, the equivalent is a discount, a partial credit or a write-off. Record it with a clear description such as service credit or goodwill discount, so the reason is visible in the ledger and not buried in a general adjustment.

How it shows up on your tax return

The CRA’s instructions for the business income form say that adjusted gross sales are your sales minus any GST/HST, provincial sales tax, and any returns, allowances and discounts included in them. In other words, refunds reduce the sales you report for income tax purposes. Most businesses must report income in the period it is earned, so a refund generally belongs with the sale it reverses; ask your accountant how to treat one that crosses a year end.

A corporation reports its revenue on a net basis in the same spirit, with refunds reducing what is reported. A year-end spike in refunds that relate to sales from the previous year deserves a note, because your accountant will want to know whether an accrual for expected refunds is needed.

Records to keep and mistakes to avoid

Keep the credit note, the original invoice or order, the refund confirmation and any dispute correspondence. The CRA expects a day-to-day record of receipts and expenses supported by bank statements and deposit records. Store them so a refund can be traced back to its sale in a few clicks.

Common mistakes include netting refunds against fees inside a bank deposit, refunding in cash with no record, forgetting that a registered customer claimed an input tax credit, and recording a chargeback as a business expense instead of a reversal of sales. For deposit mechanics see our article on payment processor payouts, and bring unusual items to your accountant with dates and amounts.

Sources & editorial notes

Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.

Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.