Occasionally a business has cause to offset an amount owed by a customer (accounts receivable) with an amount owed to a supplier (accounts payable). A contra entry journal is used to make the adjustment.
For example, suppose a business has an amount of 1,000 owed by a customer for services provided on account, but also has an amount of 200 due to a supplier (in this case the customers business) for goods it has purchased.
The amount due from the customer has been posted to the accounts receivable ledger, whereas the amount due to the supplier is posted to the accounts payable ledger.
The business has agreed with the customer that the balances are to be offset by contra entry. leaving a net amount due of 800 (1,000 – 200).
Contra Entry Journal
The business records the agreed offset with a contra entry journal as follows.
The Accounting Equation
The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the owners equity of the business. This is true at any time and applies to each transaction.
For this transaction the Accounting equation is shown in the following table.
In this case a balance sheet asset (accounts receivable account) is reduced by 200, representing the reduction in the amount due from the customer. The accounting equation is balanced by the debit entry to the accounts payable account which reduces a balance sheet liability account.
The net effect of the contra entry journal is that the balance on the accounts payable ledger is cleared and a balance of 800 remains on the accounts receivable ledger, representing the net amount outstanding from the customer.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.