Bookkeeping - Handling Refunds

[Jason Riddle]

I have received a refund for a transaction that occurred in the previous tax year.

Specifically, this transaction occurred in May 2023, but I received the refund for that amount in January 2024. I’m struggling with how to categorize the original expense as well as the refund. Also, I’m using Cash Basis Accounting.

I believe I have 2 options:

Option 1) Go back to the original expense and change the charged amount from the original dollar amount to $0.

This works, but feels a bit messy. I have to make a separate note for each transaction saying it was a refund. I now have a $0 transaction which looks odd.

Option 2) Keep the original expense for the previous year, but add the refund for this year as income.

This sounds cleaner, but I’m not sure how the refund should be categorized. I’m assuming it should have the same category as the original expense, right? Or should it be something else?

Which should I be doing? Option 1 or Option 2?