Hi @Harry 

Technically below is the process 

1. Create a Return type of order ex: (RC type - RMA )
2. Create Receipt for this order (From Actions) 
3. It will create shipment type as a “Receipt” and then click on Update IN (It will reverse the Inventory)
4. Prepare an invoice and then will create a “Credit Memo” document. 
5. If Aleady payment is collected for the actual order, we need to create a “Customer Refund” in the Payments and Applications screen for the actual payment.
6. Finally, apply the below documents to the Actual Payment and release. Payment and Invoice will be closed.
   1. Credit Memo
   2. Actual order Invoice