## **Learning Outcomes**

After completing this article, you will be able to explain the function of the payables ledger and control account, identify and process contra entries between trade payables and trade receivables, and accurately account for settlement (prompt payment) discounts in the payables ledger. You will know the appropriate double entries and be able to apply these concepts in typical ACCA exam scenarios.

## **ACCA Recording Financial Transactions (FA1) Syllabus**

For ACCA Recording Financial Transactions (FA1), it is necessary to understand how credit transactions are recorded and controlled, especially where one business both buys from and sells to the same entity, and how prompt payment discounts impact the accounts. This article focuses on the following syllabus areas:

- The role and content of the payables ledger and control account
- The correct accounting treatment of contra entries between receivables and payables
- The principles of settlement (prompt payment) discounts received from suppliers
- How these procedures are reflected in the general ledger and subsidiary ledgers
- The double entry required for each relevant transaction

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. What is a contra entry and when might it be used in payables and receivables ledgers?
2. A supplier allows a business a 3% settlement discount for payment within 7 days. How should the payment and the discount be recorded in the payables ledger?
3. Which accounts are affected when a business both buys from and sells to the same company, and they agree to offset balances?
4. True or false: The settlement discount received should be accounted for immediately when the purchase invoice is received.

## **Introduction**

Businesses often maintain separate ledgers for each trade payable and trade receivable, together with control accounts in the general ledger for overall tracking and reconciliation. Sometimes, a business has both payables and receivables accounts with the same company—being both a customer and a supplier. To avoid settling amounts both ways, the balances may be offset using a contra entry. Additionally, suppliers often offer settlement discounts (prompt payment discounts), which must be properly recorded in the accounts. This article provides clear explanations and worked examples, ensuring you can handle these typical scenarios on the FA1 exam.

> **Key Term: Payables ledger**
> A record containing the individual account balances for each credit supplier to whom the business owes money.
>
> **Key Term: Control account**
> A general ledger account summarising the total of transactions in subsidiary ledgers, such as the total balances of all payables or receivables.
>
> **Key Term: Contra entry**
> An accounting entry used to offset mutual balances where a business is both a customer and a supplier to another entity, reducing amounts owed on both sides by the same value.
>
> **Key Term: Settlement discount**
> A discount allowed by a supplier, reducing the amount payable, if the customer pays within a specified period.

## PAYABLES LEDGER, CONTROL ACCOUNTS, AND CONTRA ENTRIES

### The Payables Ledger and Control Account

The payables ledger lists and tracks individual supplier balances. Its totals are periodically compared to the payables control account in the general ledger, which maintains an overall summary.

Suppose a business purchases goods on credit from multiple suppliers. Each supplier’s account is updated in the payables ledger. The control account in the general ledger is updated for the total purchases, payments, and returns.

### What is a Contra Entry?

Where two businesses both buy from and sell to each other, it is common for each to have balances owing. Rather than making payments for the full amounts, a contra entry offsets the balances, recording only the net amount payable or receivable.

### **Worked Example 1.1**

**Scenario:**  
Company Bravo buys goods on credit from Company Delta for \$3,000 and sells goods on credit to Delta for \$2,000. Both amounts remain unpaid at month end. The companies agree to offset (contra) the smaller balance.

**Question:**  
What are the double entries to record the contra?

> **Answer:**
> The contra amount is \$2,000—the smaller of the two outstanding balances.
>
> - Debit payables (Delta) \$2,000
> - Credit receivables (Delta) \$2,000
>
> The remaining payable to Delta is \$1,000.
>
> **Exam Warning**
> Only offset mutual balances relating to the _same_ business entity. Do not use contra entries between different customers and suppliers.

## ACCOUNTING FOR SETTLEMENT (PROMPT PAYMENT) DISCOUNTS

Suppliers may encourage prompt payment by offering a settlement discount—for example, "2% discount for payment within 10 days." If taken, the business pays the reduced amount.

When payment is made within the discount period, both the cash paid and the discount must be recorded, because the total liability is reduced.

### **Worked Example 1.2**

**Scenario:**  
A business receives a purchase invoice from Supplier Zeta for \$1,000, with terms allowing a 2% discount for payment within 7 days. The invoice is paid within the discount period.

**Question:**  
What are the double entries for this payment and discount received?

> **Answer:**
> The payment is \$980 (\$1,000 – 2% of \$1,000 = \$20).

Entries:

- Debit Payables (Zeta): \$1,000
- Credit Bank: \$980
- Credit Discount received: \$20

### Handling Payables and Settlement Discounts in the Ledger

In the payables ledger, the individual supplier account is credited for the original invoice, debited for the payment, and debited for the discount received. At control account level, the same logic applies, ensuring totals remain consistent.

> **Key Term: Discount received**
> The amount deducted from an amount payable to a supplier, recorded as income when settlement is made within the specified period.

## RECONCILING CONTROL ACCOUNTS AND INDIVIDUAL BALANCES

It is good practice to reconcile the payables control account balance in the general ledger with the sum of individual supplier balances in the payables ledger. Contra entries and settlement discounts must be included in this process to ensure accuracy.

### **Worked Example 1.3**

**Scenario:**  
On 31 March, a business has three suppliers:

- Supplier A: Owes \$1,500
- Supplier B: Owes \$2,000
- Supplier C: Owes \$2,000, but \$1,200 is offset by a receivables balance from the same business.

**Question:**  
What supplier balances should appear in the payables control account after contra entry for Supplier C?

> **Answer:**
> The contra reduces both the payables and receivables balances for Supplier C by \$1,200. The control account shows:
>
> - Supplier A: \$1,500
> - Supplier B: \$2,000
> - Supplier C: \$800 (\$2,000 – \$1,200 contra)
>   Total payables: \$4,300

## **Summary**

The payables ledger records what is owed to each supplier while the payables control account provides the overall total. Contra entries allow businesses to offset mutual balances with another entity, reducing both payables and receivables. Settlement discounts are recorded when payments are made within supplier discount periods, lowering total expenses.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Explain the function and contents of the payables ledger and control account
- Identify when and how contras should be applied between payables and receivables
- Record contra entries accurately in both control and subsidiary accounts
- Account for settlement discounts correctly, including relevant double entries
- Demonstrate reconciliation of control account totals with individual balances

## **Key Terms and Concepts**

- Payables ledger
- Control account
- Contra entry
- Settlement discount
- Discount received

Payables ledger and control account - Contra entries and settlement discounts