When you need to return a product you have in inventory to your supplier and you expect your supplier to give you a credit note to be applied against future bills, you should follow the steps below:
1. Reduce your inventory by doing an inventory adjustment (from the Menu, Products, Adjustments), enter the part number of the product and find the inventory to return. Reduce the inventory by the quantity returned.. Choose a balancing account which is typically an expense account but in this case you can created a new GL account of type Asset: Pending Supplier Return Credits. You can choose to give any name to this GL account. Enter the effective date and then post the adjustment. This will create an account transaction that credits your asset account for the product and then debits the balancing account chosen (Pending Supplier Return Credits in the example). This GL account holds the total credits you are expecting from your suppliers.
2. When your supplier issues a credit note, you can create a negative bill to record the credit you received. Choose the supplier who issued the credit note, create the bill, create one line in the bill and select the account used for inventory adjustment (in our example, it is an asset account called Pending Supplier Return Credits). Enter the credit as a negative amount for the bill item line and then post the bill. This bill is available to be used to offset future bill payment to this supplier. After the bill is posted, the GL account Pending Supplier Return Credits will have its balance reduced to zero since the credit has been received.
3. When you are paying bills to this supplier, this negative bill will appear as a bill you can apply payment for (From Bill menu, Make Payment). Since the amount is negative, you would need to use it to offset amounts from other bills. Choose to "pay" this bill and it will reduce the actual payment amount.