Here's a couple of scenarios where you might need to record credit from your supplier, and how you should handle it.
A purchase invoice you're yet to pay has its price lowered
Let's say that you've received a purchase invoice from one of your suppliers for a net expense figure of £1,000. However, before you have made your payment you realise that the invoice was only meant to be for a net value of £100, and inform your supplier, who agrees and issues you £900 of credit. This is where you should use a credit note instead of a refund because you cannot record being refunded money that you never paid out.
Instead, you can record a supplier credit note for £900, and the amount you owe to your supplier will be reduced to £100.
You have paid for an expense but have received your money back
For this example, let's imagine that you have paid out £500 to your supplier for an airfare. However, due to their poor service and your following complaints, they decide that they will give you your money back. This is where you should use a refund.
To create a supplier refund you will first need to raise a credit note for the amount you are being refunded, and then to record how the money came back into your account you will need to create a refund.
In bank reconciliation, you will then have to reconcile the initial expense payment with when the money left your account and then reconcile the refund with when the money came back in again.
Combinations of credit notes and refunds
You can record combinations of credit notes and refunds to accurately reflect reality. For example, you may have an invoice lowered in price before you pay and then be refunded the amount you do pay, at a later stage.