A contra between accounts happens when the same party appears in both the sales ledger as a customer and the purchases ledger as a supplier. Instead of each side paying the other, the two debts are set off against each other. You meet it as one extra line in a receivables or payables control account.
It builds on the two control accounts from receivables and payables.
Why set off two debts?
Suppose Hasan Trading buys goods from your business and also supplies goods to it. Paying each other in full would move cash both ways for no reason. A set-off cancels the smaller debt and leaves one payment for the difference.
No cash moves, so the entry passes through the journal, not the cash book. Each ledger needs one entry, and each control account needs one matching entry.
How the entries work
- Find the amount to set off, which is the smaller of the two balances.
- In the payables ledger, debit the supplier’s account (the debt owed falls).
- In the sales ledger, credit the customer’s account (the debt owed to you falls).
- In the control accounts, post the same amount: credit receivables control, debit payables control.
The debit and credit are equal, so the books still balance.
Worked example
Rimba Timber sells to and buys from Hasan Trading. At the month end, Hasan owes Rimba RM 1,500 as a customer, and Rimba owes Hasan RM 2,100 as a supplier. They agree to set off RM 1,500.
In the individual accounts: Hasan’s customer account is credited RM 1,500 and falls to nil. Hasan’s supplier account is debited RM 1,500 and falls to RM 600 owed.
The journal entry: debit payables control RM 1,500, credit receivables control RM 1,500.
The month’s other totals for the whole business are below.
| Receivables control | RM |
|---|---|
| Opening balance | 6,400 |
| Credit sales | 22,000 |
| Cheques received | 19,300 |
| Sales returns | 800 |
| Contra with payables | 1,500 |
| Payables control | RM |
|---|---|
| Opening balance | 5,100 |
| Credit purchases | 14,800 |
| Payments | 13,200 |
| Purchase returns | 600 |
| Contra with receivables | 1,500 |
Receivables control: debit side 6,400 + 22,000 = 28,400. Credit items 19,300 + 800 + 1,500 = 21,600. Balance c/d = 28,400 − 21,600 = RM 6,800.
Payables control: credit side 5,100 + 14,800 = 19,900. Debit items 13,200 + 600 + 1,500 = 15,300. Balance c/d = 19,900 − 15,300 = RM 4,600.
| Debit | RM | Credit | RM |
|---|---|---|---|
| Balance b/d | 6,400 | Bank | 19,300 |
| Credit sales | 22,000 | Sales returns | 800 |
| Contra: payables control | 1,500 | ||
| Balance c/d | 6,800 | ||
| 28,400 | 28,400 |
| Debit | RM | Credit | RM |
|---|---|---|---|
| Bank | 13,200 | Balance b/d | 5,100 |
| Purchase returns | 600 | Credit purchases | 14,800 |
| Contra: receivables control | 1,500 | ||
| Balance c/d | 4,600 | ||
| 19,900 | 19,900 |
Both accounts balance. Hasan is now owed only RM 600, and that RM 600 is one of the supplier balances inside the RM 4,600.
The mistake to watch for
A common slip is to post the contra to only one control account.
Mistaken answer: the student credits receivables control with RM 1,500 but forgets the debit in payables control. Payables closes at RM 6,100.
The correct closing balance is RM 4,600, so payables is overstated by RM 1,500 and no longer matches the supplier accounts.
The correction is to treat a contra as a pair of entries: one credit in receivables control and one debit in payables control, equal in value. Before moving on, check that both control accounts show the same RM 1,500.
Check yourself
Work on paper first, then open each answer.
1. A customer owes RM 900 and the same party is a supplier owed RM 1,400. A contra of RM 900 is agreed. Who owes whom afterwards, and how much?
Show answer
The customer balance falls to nil. The supplier balance falls to 1,400 − 900 = RM 500, owed by the business.
2. State the control account entries for that RM 900 contra.
Show answer
Debit payables control RM 900 and credit receivables control RM 900.
3. True or false: a contra between ledgers is entered in the cash book.
Show answer
False. No money moves, so it goes through the journal. The cash book contra is a separate idea, covered in record a contra entry.
Where this leads next
Once contras feel natural, move on to investigate a difference using a fictional schedule, then work through the control accounts practice set. The double-entry and ledger trainer shows the paired entries.
Some students know the rule but place the second entry on the wrong side under time pressure. A teacher in online one-to-one Accounting tuition can watch that moment and correct it as it happens.