What action should you take to refund a customer overpayment in Xero?

When a customer has overpaid, the most appropriate action to refund them in Xero is to process a cash refund. This method directly addresses the overpayment by returning the excess amount back to the customer, ensuring that their account balance reflects the correct amount owed.

Processing a cash refund involves recording the transaction so that the financial records accurately show this reimbursement. It reflects both the reduction in cash available to your business and adjusts the customer’s outstanding balance, maintaining the integrity of your financial data.

While other options such as creating a new invoice, sending a credit note, or issuing store credit could be relevant in different situations, they do not directly address the need to return cash for an overpayment. Creating a new invoice, for instance, could lead to confusion about the payments and balances if not handled correctly, while credit notes may be used for adjustments against future transactions rather than immediate refunds. Store credits lock the customer into future purchases, which may not satisfy the need for a straightforward cash refund.