We prepaid a vendor for product in the previous month, November.  Therefore, we recorded the cash payment as a prepayment so that we could reconcile the books.  However, we have now been told that the units will not be available and the supplier has returned our money to us.  We currently have the prepayment on the vendor account as it should have been cleared with an invoice but now we need to receive the cash back and clear the prepayment.  Just creating a Debit Note for the vendor account doesn't fully resolve the issue as that doesn't allow for the money to be reconciled on the bank statement.  Recording a miscellaneous payment in AR allows the bank to reconcile but it doesn't clear the vendor account.

What would be the best way to clear the vendor account and record the cash received so that both sides of the transaction are clear?

Thanks,

Lisa