That would work fine if I had bills. But I'm COD most everywhere, so things go in as an expense because I pay up front, instead of receiving a bill and putting it in the A/P account, and when I return something it comes right back to my bank account or cash account. 

I believe the way that you proposed would only work if I received bills from my vendor and therefore could actually apply the credit to a bill but since I don't have bills there would be no way to clear out the vendor credit.

For most my returns I add them straight from my banking tab and it doesn't let me assign a customer or project.

Unless I am doing that improperly and not using the system the way I should?