AccountRight Premier and Enterprise only
Many businesses take advantage of reducing their outgoing cash flow by substituting goods or services for the payment of their account held with the other business. These contra type deals are easily tracked in AccountRight as detailed in Dealing with a supplier who is also a customer. If a foreign currency is involved, this support note explains what to do.
What's a contra deal?
Contra deals are a convenient means by which two businesses trade between each other, using their goods or services supplied to each other as payment for those received.
An overseas supplier Nash Gardner who is also our customer. By arrangement when we purchase goods from Nash we pay him in European Union Euros (EURO), but when we sell him goods he pays us in United States Dollars (USD).
Nash Gardner owes us USD $5000 for metal scrap. By arrangement, Nash sells us cargo containers to a value of EURO 16000.
Nash has effectively sold us his goods and has used the income of the sale to pay for the metal scrap purchase. Nash is now both a customer and a supplier. We need to record the sales, purchases and payments in such a way that a closing balance can be determined.
To handle this type of scenario, you'll need to set up a customer and supplier card for the other business as well as a contra clearing account from which the contra deals are paid. You can then record your sales and purchases.
Let's step you through it.
Before you begin
The tasks below assume you have activated AccountRight's multicurrency feature (Setup > Preferences > System tab > I Deal in Multiple Currencies).
Two cards will be required for the other business: a customer card and a supplier card.
Using the example above:
- As Nash is now also a supplier, we will need to create a supplier card for him. If the other business is a customer such as Nash is to us, then a customer card for the other business will be needed.
- The supplier card for Nash will be Euro as we pay him in Euros, but the customer card will be in USD as Nash pays us in that currency.
To create a new card:
- Go to the Card File command centre, click Card List then click New.
- For the Card Type select Supplier or Customer.
- Enter the other business's details and the currency you trade in with the specific business then click OK.
A clearing account is simply an account used to temporarily hold funds. You need to set up a Contra Clearing Account which you'll use when recording the sales and purchases of the other business in your local currency. This account is then balanced when you pay for those sales and purchases.
- Go to the Accounts command centre and click Account List.
- Select the Asset tab and click New.
- Make sure you select Bank in the Account Type drop-down menu.
- Give the account a unique number that suits your account list.
- Name the account Contra Clearing Account.
- Click OK.
Record the sales and purchases to the other business using Sales > Enter Sales and Purchases > Enter Purchases. Enter these transactions as they would normally be entered using multicurrency.
Referring back to our Nash Gardner example, the sales/purchases entered in our company file would be:
- A sale for USD $5000
- A purchase for EURO 16000
For this example we will consider present exchange rates of:
Local $1=EURO 0.625 or EURO 1=Local $1.60
Local $1=USD $0.75 or USD $1=Local $1.333333
Payments received from the other business are in the form of the goods/service they provided us, so we need to credit this as a payment to their account.
- Go to the Sales command centre and click Receive Payments.
- Click the Deposit to Account option then select the Contra Clearing Account in the adjacent Account field.
- Select the Customer then enter the Amount Received, which needs to be the value of the goods/service supplied to us in the currency the deal is to be done which in this case is USD.
- Enter the Memo, Date and set the Payment Method to Other.
- Click into the Amount Applied field and if necessary enter the amount.
- Click Record.
The example below will result in a deposit of Local $6666.67 into the Contra Clearing Account. This can be quickly checked by viewing the Contra Clearing Account balance in the Accounts List window.
The amount deposited into the Contra Clearing Account will be the equivalent of USD $5000 (at the current exchange rate USD $1=Local $1.333333). AccountRight will automatically convert the USD amount into Local $ and transfer it into your Contra Clearing Account taking into consideration the Transaction Exchange Rate.
A payment now needs to be applied to the open bill.
- Go to the Purchases command centre and click Pay Bills.
- Click the Pay from Account option then select the Contra Clearing Account in the adjacent Account field.
- Select the Supplier and the outstanding bill for the value of the service/goods they supplied us will appear. In this case � 16,000
Enter the Memo and Date then calculate the amount of Euro that the total Local $ in the Contra Clearing Account can buy. This calculation is done as follows:
EUR 1=Local $1.60
EUR ? =Local $6666.67
Local $6666.67 / 1.60= EUR 4166.67
- Enter this amount into the Amount field and apply it against the bill to be paid.
This will result in a withdrawal of $6666.67 from the Contra Clearing Account. It will offset the $6666.67 Receive Payments deposit, leaving the Contra Clearing Account with a zero balance. This can be quickly checked by viewing the Contra Clearing Account balance in the Accounts List window.
If you have a few cents balance in the Contra Clearing Account a General Journal entry can be done, allocated to the Currency Gain/Loss Account as this difference can be caused due to rounding in different exchange rates.
Who owes who?
This is determined by using a combination of the Receivables Aging Detail report and the Payables Aging Detail report. Both these reports will list the activity and account balance for the other business.
In our example, the Payables Aging Detail report will show that Nash's account has an outstanding balance of EUR 11833.33. The Receivables Aging Detail report will show that Nash has no outstanding invoices with us, so a payment of EUR 11833.33 is required by us to Nash to close the contra deals.
If we were to view the Receivables Aging Detail report in Nash's company file, it would show that we owed him.
The window below shows the final payment made to Nash. This needs to be entered using Pay Bills and applied to the open bill. Similarly, Nash would use Receive Payments.
In the Pay from Account field, select your Cheque Account because this is where the funds need to be withdrawn from, not the Contra Clearing Account.