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2.1 WHAT IS A CONTRA?

Sometimes a business, A, may purchase goods from another business, B, and may also sell goods to B. In this case, A would have a payable to B and also a receivable due from B. These balances can be netted off against each other as the balances are owed to and from the same business.

2.2 ACCOUNTING ENTRIES FOR A CONTRA

You need to reduce the trade receivables' asset i.e. credit to reduce it. You also need to reduce the trade payables' liability i.e. debit to reduce it.

Remember also that the individual accounts in the payables' ledger and receivables ledgers will also be simultaneously updated when this transaction is recorded in the accounting system.

EXAMPLE - ACCOUNTING FOR A CONTRA

At 31 March 20X8, P Ahmed had total receivables' of $73,427 and total payables of $59,012. The receivables total included an amount due from J Singh of $3,500, and the payables total included an amount due to J Singh of $6,250. J Singh and P Ahmed agreed that they should contra the maximum amount possible, rather than making payments to each other.

Prepare P Ahmed's receivables' and payables' general ledger accounts as at 31 March 20X8 having accounted for the contra. Prepare also P Ahmed's memorandum receivables' ledger and payables' ledger accounts with J Singh.

SOLUTION