How do you record transactions when a customer is also a supplier? A contra account makes allowances for payments in the form of products or services rather than cash. We’ll define contra below as well as discuss how to record a contra invoice in your accounts.
What does contra mean?
First things first: what does contra mean for businesses? The contra meaning is closely related to the traditional concept of bartering or trading. This means that a customer and supplier might be the one and the same, with both parties trading goods or services of equal value. To record and define contra payments, you must then offset the difference between two invoices or bills. This keeps the contra payment separate from your usual cash receivables.
Creating a contra invoice
The first step to entering a contra payment into your accounting system is to create both a sale and purchasing invoice. Because the customer is also a supplier, you’ll be charging them with a contra invoice as well as a bill to record the payment. You’ll then need to offset any outstanding invoices from the customer and supplier, with both going to the same company or individual.
When you create a contra invoice, you’ll also use a bank account specifically to receive contra payments. This ensures that when you record payments, they won’t have an impact on your usual business account balance.
Making a contra payment
The specific procedure to make a contra payment will depend on your accounting system and business needs. Generally, you can follow these steps.
Create a new contra entry account. Open a bank account to be used specifically for contra payments, ensuring they stay separate from your usual current account.
Record your contra payment against outstanding sales invoices. Click through to your sales invoices in your accounting software, choosing the relevant invoice and recording your contra entry. You’ll need to enter the amount you’ve received from the customer/supplier, posting any offset payment amount into your contra bank account.
Record your contra payment against outstanding purchase invoices. You’ll follow the same procedure for outstanding purchase invoices. Pay the same value for the sales invoice as the purchase invoice, reflecting the equal trade for goods and services.
After you’ve recorded contra payments for both the sales and purchase invoice, your contra entry bank account should be balanced at zero. However, if one invoice was higher than the other, you’ll need to use your normal bank account to record a payment against it after the balancing payment has been received.
Contra meaning and example
To illustrate how this works when the invoices don’t automatically cancel one another out, imagine that you have both an outstanding sales invoice for £100 and a purchase invoice for £75. These are both issued for the same company, your customer/supplier. The outstanding sales amount owed will only be £25, because you’ll enter a contra entry for the £75 purchase invoice.
Post the contra entry to your account using the steps above and you’ll have an outstanding amount of £25 on the sales invoice. The purchase invoice can be marked as fully paid, with the contra entry account displaying a zero balance. Once the £25 payment has been received from the customer, you’ll record this in your usual business bank account.
The most important thing to remember is that contra payments require their own separate account to keep them separate from your usual invoices. This is easy to set up in your choice of accounting software, which will have a dedicated template for contra and barter transactions.
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