Once an order is invoiced and shipped, you are able to process a return. A return is called a Credit Memo in Magento. Follow these steps to create a Credit Memo.
1. Select the order you wish to refund
2. Click on the invoices tab
3. Click the Credit Memo Button
You will be brought to a credit memo page. Here you will have the option to refund specific items or the whole order.
In the QTY to Refund box, enter the amount you want to refund. If you are not refunding the item, enter 0. If you want to return the items back to inventory, select the Return to Stock check box. Once done, click Update QTYs.
The subtotal amount will update according to what you want to return.
If you charged shipping on your order, you can decide if you want to refund this or not. If you wish to keep the amount of shipping and not refund it to the customer, enter in 0 for this amount.
Adjustment Refund is used if you want to give the customer some money back but not necessarily return an item. For example. say a customer orders an item but there is a small issue. The customer is going to keep the item but customer service wants to refund $10 to keep the customer happy. You will enter 10 in the adjustment refund and not return any items.
Adjustment Fee is used if you want to charge the customer an additional fee to do a refund. For example, there is a $5 restocking fee for all returned items. You would enter 5 in the Adjustment Fee column.
Once ready, click refund. There will be two options if your store is connected to a payment processor. The two options will be Refund and Refund Offline. If you want the money automatically refunded to your payment processor, hit Refund. If you want to manually refund the amount, click Refund Offline. If you select Refund offline, you will see a Credit Memo in Magento but the money is not physically refunded to the customer. It will need to be done manually.
4. After the Credit memo has been made, you will see a Credit Memo under the Credit Memo tab of the order