Managing business finances accurately is one of the most important responsibilities of any business owner. When vendors issue refunds, discounts, or billing corrections, vendor credits come into play. If you’re using QuickBooks Online (QBO), knowing how to apply vendor credits correctly can save you from accounting errors, duplicate payments, and inaccurate reports.
In this complete guide, you’ll learn how to apply vendor credit in QuickBooks Online, why vendor credits matter, common mistakes to avoid, and best practices to keep your accounts payable clean and accurate.
This guide is written for small business owners, bookkeepers, and accountants, and no advanced accounting knowledge is required.
Table of Contents
- What Is a Vendor Credit in QuickBooks Online?
- Why Vendor Credits Are Important
- Common Situations When Vendor Credits Are Used
- How Vendor Credits Affect Your Accounting
- How to Enter a Vendor Credit in QuickBooks Online
- How to Apply Vendor Credit to a Bill in QuickBooks Online
- How to Apply Vendor Credit to a Future Bill
- How to Apply Vendor Credit When Paying Bills
- How to Apply Vendor Credit to Expenses
- How to Apply Vendor Credit to an Open Balance
- How to Check Vendor Credit Balance
- How to Delete or Edit a Vendor Credit
- Common Mistakes to Avoid When Applying Vendor Credits
- Vendor Credits vs Refunds: What’s the Difference?
- Best Practices for Managing Vendor Credits
- Frequently Asked Questions (FAQs)
- Final Thoughts
1. What Is a Vendor Credit in QuickBooks Online?
A vendor credit in QuickBooks Online is a transaction that records money a vendor owes you. This usually happens when:
- You return purchased items
- You were overcharged
- A vendor issues a discount or adjustment
- An invoice is corrected
Instead of receiving cash back, the vendor often issues a credit memo that can be applied to future bills.
In QuickBooks Online, vendor credits reduce what you owe to that vendor and are tracked in Accounts Payable (A/P).
2. Why Vendor Credits Are Important
Vendor credits may seem small, but mishandling them can lead to:
- Overpaying vendors
- Incorrect profit and loss reports
- Inaccurate accounts payable balances
- Reconciliation issues
Properly applying vendor credits ensures:
- Accurate financial statements
- Clean vendor records
- Correct bill payments
- Better cash flow management
3. Common Situations When Vendor Credits Are Used
Vendor credits typically occur in the following scenarios:
Returned Goods
You return damaged or incorrect inventory and receive a credit instead of a refund.
Billing Errors
The vendor accidentally charges you twice or applies the wrong rate.
Early Payment Discounts
Some vendors offer discounts that appear as credits.
Contract Adjustments
Long-term agreements sometimes require billing corrections.
4. How Vendor Credits Affect Your Accounting
When you record a vendor credit in QuickBooks Online:
- Accounts Payable decreases
- Expense or inventory accounts adjust
- Vendor balance becomes negative until applied
Vendor credits do not affect income. They reduce expenses or liabilities depending on how they’re applied.
5. How to Enter a Vendor Credit in QuickBooks Online
Before applying a vendor credit, you must record it correctly.
Step-by-Step: Enter Vendor Credit in QBO
- Log in to QuickBooks Online
- Click + New (top left)
- Select Vendor credit
- Choose the Vendor name
- Enter the Credit date
- Select the Category or Item
- Enter the Amount
- Add a memo (optional but recommended)
- Click Save and close
✅ Your vendor credit is now recorded and ready to be applied.
6. How to Apply Vendor Credit to a Bill in QuickBooks Online
This is the most common and recommended method.
Step-by-Step: Apply Vendor Credit to an Existing Bill
- Click + New
- Select Pay bills
- Choose the Vendor
- Select the Bill you want to pay
- You’ll see the Available Vendor Credits
- Check the box next to the vendor credit
- Adjust the amount if needed
- Click Save and close
QuickBooks automatically applies the credit and reduces the bill balance.
7. How to Apply Vendor Credit to a Future Bill
If no bill exists yet, QuickBooks will hold the credit until a bill is created.
How It Works
- The vendor credit sits as an open credit
- Once a new bill is entered:
- Go to Pay bills
- Apply the credit the same way as above
This is ideal when you expect future purchases from the same vendor.
8. How to Apply Vendor Credit When Paying Bills
You can apply vendor credits at the time of bill payment.
Steps
- Go to + New → Pay bills
- Select the vendor
- Choose the bill(s)
- Apply available vendor credits
- Enter payment details
- Save the transaction
QuickBooks automatically calculates the remaining payment amount.
9. How to Apply Vendor Credit to Expenses
If you originally recorded an expense instead of a bill:
Option 1: Convert Expense to Bill
- Edit the expense
- Change it to a bill
- Apply the vendor credit normally
Option 2: Record Credit as Expense
- Create vendor credit
- Use the same expense category
- Match dates and amounts carefully
10. How to Apply Vendor Credit to an Open Balance
To check open balances:
- Go to Expenses
- Click Vendors
- Select the vendor
- Review open credits and bills
Apply credits through Pay bills to clear balances.
11. How to Check Vendor Credit Balance
To see all vendor credits:
Vendor Report
- Go to Reports
- Search Vendor Balance Detail
- Customize dates
- Review open credits
This report helps identify unused credits.
12. How to Delete or Edit a Vendor Credit
To Edit:
- Open the vendor credit
- Make changes
- Save
To Delete:
- Open the credit
- Click More
- Select Delete
⚠️ Always confirm the credit isn’t applied to a bill before deleting.
13. Common Mistakes to Avoid When Applying Vendor Credits
❌ Applying credit to the wrong vendor
❌ Recording refunds instead of credits
❌ Forgetting to apply credits before paying bills
❌ Deleting credits already applied
❌ Using incorrect expense categories
Avoiding these mistakes ensures clean books.
14. Best Practices for Managing Vendor Credits
✔ Always match credits to original expenses
✔ Apply credits before making payments
✔ Review vendor balances monthly
✔ Keep notes and documentation
✔ Run vendor reports regularly
Good habits prevent accounting errors.
15. Frequently Asked Questions (FAQs)
Can vendor credits be applied automatically?
No. You must manually apply them in Pay bills.
Can I apply one credit to multiple bills?
Yes, as long as it’s the same vendor.
Do vendor credits affect taxes?
They reduce expenses, which can affect taxable income.
Can I issue a refund instead of a credit?
Yes, if the vendor refunds you directly.
16. Final Thoughts
Understanding how to apply vendor credit in QuickBooks Online is essential for accurate bookkeeping and smart cash management. Vendor credits help you avoid overpayments, keep vendor balances accurate, and maintain clean financial records.
By following the step-by-step instructions in this guide and using best practices, you can confidently manage vendor credits like a pro—whether you’re a small business owner or a professional bookkeeper.
If you use QuickBooks Online regularly, mastering vendor credits is not optional—it’s essential.
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