You would need to record the credit as a negative invoice to the appropriate expense accounts. Then when you go into the payments window you will see that line item with the negative balance and you can apply all or part of it to an outstanding invoice.

Okay so I entered in all our outstanding credit memos as negative invoices. I just want to make sure I am on the right track as we have always just paid upfront not off existing credit.

When I go to pay purchase invoices and type in the specific vendor I now have three negative invoices to choose from. I understand that if I enter the amount of the invoice into the payment amount it will just make the amount of the credit lower until it is all used up. My question is which account do I use at the top in the paid by section?

My options are chq, cash, credit card 1 or credit card 2 from accounts: savings, chequing, foreign, loans from shareholder or credit card 1/2.

Is there any way I can show which invoice specifically the credit card was applied to?

Thanks

I generally use a payment method of cash for these offsetting entries, mainly you just want to avoid cheque as it will consume a cheque. Since the net amount of your payment will be zero, no activity will be recorded to the payment account (chequing, savings, etc.) so it's really just about what you want to see on the journal entry. Once you've posted this you can find the 'payment' in the Payments Lookup - it will just be a $0 amount - or on the Vendor Aged reports.

When I went to enter the payment I tried it as a positive amount and I get the error message "Reversals cannot exceed the amount paid on the invoice". So I tried entering it as a negative number and it did reduce the 'amount owing' by the correct amount however when I go to look it up in payments or vendor aged reports it is debiting my chequing account and crediting acct. payables. It is also showing up on my acct. rec. as a deposit which it technically isn't since it never did enter my account.

You need to have a purchase invoice amount to apply the credit against. If the total of your payment is a negative amount you are telling Sage that you received the funds back from the vendor. If you don't have an invoice to offset the credits with then there is nothing further to be done. The payments entry to apply a credit should look roughly like this:

Invoice 1234 $5000 Amount paid $5000
Credit 4321 -$3000 Amount paid -$3000
Credit 5432 -$3000 Amount paid -$2000

Net payment amount is zero. Invoice 1234 and credit 4321 are now 'paid' and credit 5432 shows an outstanding amount of -$1000.