2 ACCOUNTING FOR CONTRAS

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.

Debit

Trade payables

Credit

Trade receivables

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, J Singh had total receivables' of $58,000 and total payables of $47,250. The receivables total included an amount due from P Ahmed of $6,250, and the payables total included an amount due to P Ahmed of $3,500. J Singh and P Ahmed agreed that they should contra an amount of $3,500, being the maximum that could be accounted for in this way.

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

SOLUTION

Trade receivables

Date$Date$
31 Mar X8Balance b/d58,00031 Mar X8Contra payables3,500
58,00031 Mar X8Bal c/d54,500
31 Mar X8Balance b/d54,50058,000

Trade payables

Date$Date$
31 Mar X8Contra-rec'ables3,50031 Mar X8Balance b/d47,250
31 Mar X8Balance c/d43,75047,250
47,25031 Mar X8Balance b/d47,250

P Ahmed - Receivable ledger

Date$Date$
31 Mar X8Balance b/d6,25031 Mar X8Contra -payables3,500
6,25031 Mar X8Bal c/d2,750
31 Mar X8Balance b/d2,7506,250

P Ahmed - Payable ledger

Date$Date$
31 Mar X8Contra -rec'ables3,50031 Mar X8Balance b/d3,500
31 Mar X8Balance c/dNil3,500
3,50031 Mar X8Balance b/dNil

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