ANSWER ID:9095

Many businesses take advantage of reducing their outgoing cash flow by substituting goods and services for the payment of their account held with another business. This support note explains what is involved in tracking these contra type deals.

Here's what we'll cover:

What is a contra deal?

Setting up your software to record contra deals

Recording and paying contra sales and purchases

Who owes who?

What is a contra deal?

Contra deals are a convenient means by which two businesses trade between each other using their goods and services supplied to each other as payment for those received.

Example:

Jim Gardner owes you $500 for a new lawnmower. By arrangement, Jim cuts your lawns and trims some trees and his bill to you totals $170. You credit the cost of his service to the invoice for the lawnmower, leaving a balance of $330. He comes back the week after and mows your lawns again, and again the amount owing on the lawnmower is reduced by the amount he charges you. Jim has effectively sold you his service and has used the income of the sale to pay for the lawnmower. Jim is now both a customer and a supplier. You need to record the sales, purchases and payments in such a way that a closing balance can be determined.

Setting up your software to record contra deals

The following tasks need to be completed to enable contra deals to be recorded:

• a new supplier card and customer card for the other business, and
• a contra clearing account from which the contra deals are paid.

Task 1 - Setup new cards

Two cards need to be set up for the other business - a supplier card and a customer card. Using the example above, as Jim is now also a supplier, you will need to create a supplier card for him. If the other business is a supplier (such as you are to Jim) then a customer card for the other business will be needed.

To create a new card:

1. Go to the Card File command centre, click Cards List.
2. Click New.
3. Click the Card Type drop down arrow and select Supplier or Customer.
4. Enter the other business's details then click OK.

Task 2 - Setup a contra clearing account

The contra clearing account is setup as a cheque account and is used to pay the bills and invoices of the other business.

1. Go to the Accounts command centre and click Account List.
2. Click the Asset tab then click New.
3. Select Bank in the Account Type field.
4. Give the account a unique number that suits your account list.
5. Name the account Contra Clearing Account.
6. Click OK. An example account setup is shown below.

Recording and paying contra sales and purchases

Task 1 - Recording the sales and purchases

Record the sales and purchases to the other business using Enter Sales and Enter Purchases. Enter these transactions as they would normally be entered.

Referring back to our Jim Gardner example, the sales/purchases entered would be:

• A sale for $500.
• Two purchases - one for $170 and another for $90.

Jim now owes you $240 and so he is a debtor. From Jim's perspective, he owes you and we are now a creditor.

Task 2 - Recording the contra deal payments

Receive Payments

Payments received from the other business are in the form of the goods/service they provided you, so you need to credit this as a payment to their account.

1. Go to the Sales command centre and click Receive Payments.
2. Click the Deposit to Account option then select the Contra Clearing Account in the adjacent Account field.
3. Select the Customer then enter the Amount Received. This needs to be the value of the goods/service supplied to you.
4. Enter the Memo, Date and set the Payment Method to Other.
5. Place your cursor in the Amount Applied field and if necessary enter the amount.
6. Click Record.

The window below shows our example Receive Payments transaction. This will result in a deposit of $260 into the Contra Clearing Account.

Pay bills

Again, although you won't be paying for the service/goods we received, a payment still needs to be applied to the Bill.

1. Go to the Purchases command centre and click Pay Bills.
2. Click the Pay From Account option then select the Contra Clearing Account in the adjacent Account field.
3. Select the Supplier then enter the Amount - the value of the service/goods they supplied you.
4. Enter the Memo and Date then apply the payment to the open Bills.
5. Click Record.

The window below shows the Pay Bills transaction for the services Jim supplied you.

This will result in a withdrawal of $260 from the Contra Clearing Account. It will offset the $260 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.

Who owes who?

This is determined by using a combination of the Receivables Ageing Detail and Payables Ageing Detail reports. Both these reports will list the activity and account balance for the other business.

In our example, the Receivables Ageing Detail report will show that Jim's account has an outstanding balance of $240. Whereas the Payables Ageing Detail report will show that Jim's bills to you have been paid. A payment of $240 is required by Jim to close the contra deals.

If you were to view the Payables Ageing Detail report in Jim's company file, it would show that he owed you.

The window below shows the final payment received from Jim. This needs to be entered using Receive Payments and applied to the open invoice. Similarly, Jim would use Pay Bills.

Note: The Deposit To Account option is selected and the General Cheque Account is entered in the adjacent account field. This needs to be deposited into your cheque account and not the Contra Clearing Account.