## Learning Outcomes

After studying this article, you will be able to explain the structure and use of the receivables ledger and control account, identify what contra entries and set-offs are, perform the correct double entry for contra balances, and accurately update control accounts. You will gain confidence in recognizing and handling situations where a customer is also a supplier, an area often examined in ACCA FA1.

## ACCA Recording Financial Transactions (FA1) Syllabus

For ACCA Recording Financial Transactions (FA1), you are required to understand how receivables and payables balances are controlled and updated in business accounting systems. This article focuses on:

- The structure and purpose of receivables ledgers and the receivables control account
- How to record contra entries when offsetting mutual balances with another business
- Applying correct double entry for set-offs between receivables and payables accounts
- Maintaining accurate general ledger and subsidiary ledger records

## Test Your Knowledge

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

1. What is a contra entry in the context of receivables and payables ledgers?
2. If a business both sells to and buys from another business, which accounts are affected when they offset the amounts owed?
3. True or false? After a contra entry, both the receivables and payables control accounts decrease.
4. Which ledger account(s) should you update when setting off mutual balances with a supplier who is also a customer?

## Introduction

Efficient management of amounts owed to and by a business is essential for good accounting controls. The receivables ledger records what each customer owes, while the receivables control account in the general ledger tracks the total owed by all customers. Sometimes, a business might both sell to and buy from the same company. In these cases, contra entries and set-offs are used to offset mutual balances. Knowing how to identify, record, and check these entries is a key skill for the ACCA FA1 exam.

> **Key Term: Receivables ledger**
> A record (subsidiary ledger) listing individual account balances for each customer who buys on credit.
> **Key Term: Receivables control account**
> The general ledger account that records the total amount owed by all credit customers.
> **Key Term: Contra entry**
> An accounting entry offsetting amounts owed to and by the same business, reducing both receivables and payables balances.
> **Key Term: Set-off**
> The process of offsetting mutual balances between receivables (customer) and payables (supplier) accounts for businesses that trade both ways.

### RECEIVABLES LEDGER, CONTROL ACCOUNT, AND CONTRA ENTRIES

The receivables ledger shows what each customer owes, while the receivables control account in the general ledger holds the total balance owed by all customers at a given time. These two records are regularly reconciled to detect errors.

![Contra entry processing from authorisation through journal posting, ledger updates, control account reconciliation, and investigation of differences in receivables and payables records.](https://static.pastpaperhero.com/images/acca-fa1-receivables-ledger-and-control-account-contra-entries-and-set-offs_00.png)

_Set-off procedures show authorised contra journals, postings to subsidiary ledgers, and reconciliation of receivables and payables control accounts._

Many businesses have customers who are also suppliers. This can result in both receivables (customer) and payables (supplier) balances with the same company. Instead of making two separate payments, these can be offset—called a "contra entry"—to reduce the amounts owed in both ledgers.

### How It Works

Suppose your business sells \$3,000 worth of goods (on credit) to Lee Ltd and also buys \$2,000 of supplies (on credit) from Lee Ltd. At month-end, you owe Lee Ltd \$2,000, but they owe you \$3,000.

Instead of each party making and receiving full payment, they agree to net off (set-off) the mutual balances:

- The business receives a payment (or records a receipt) for only the difference, \$1,000.
- Both businesses reduce their receivables and payables by the value being set off (\$2,000).

### Double Entry for Contra Entries

A contra entry reduces the receivables balance and payables balance for the same company. The entries are:

- Debit: Payables control account (reduces the amount owed to the supplier)
- Credit: Receivables control account (reduces the amount owed by the customer)

This shows that part of the amount owed is settled not by cash payment, but by offsetting reciprocal debts.

> **Key Term: Double entry**
> The bookkeeping principle that every transaction is entered as both a debit in one account and a credit in another, ensuring the accounting equation remains balanced.

### Worked Example 1.1

Scenario:
Your company, Zodiac Traders, sells goods worth \$4,500 (on credit) to Orbit Ltd. At the same time, Zodiac buys office supplies from Orbit Ltd on credit for \$2,000. At the end of the month, both companies still owe each other these amounts. They agree to set off the balances with a contra entry.

Question:
Show the double entries required in the general ledger accounts of Zodiac Traders.

> **Answer:**
>
> - Debit: Payables control account (Orbit Ltd) \$2,000
> - Credit: Receivables control account (Orbit Ltd) \$2,000
>   This reduces both the total owed by Orbit Ltd (customer) and the amount Zodiac owes to Orbit Ltd (supplier).
>   The new balance in the receivables ledger for Orbit Ltd is \$2,500 (\$4,500 - \$2,000).
>   The new balance in the payables ledger for Orbit Ltd is zero (\$2,000 - \$2,000).

### Worked Example 1.2

Scenario:
Atlas Ltd buys materials from Delta Co for \$1,800 (credit) and sells finished goods to Delta Co for \$1,200 (credit). Rather than exchanging full payment, they agree to offset.

Question:
After a contra entry is made, what balances appear in Atlas Ltd's receivables and payables ledgers for Delta Co?

> **Answer:**
>
> - The smaller of the two balances is \$1,200. This becomes the contra amount.
> - Debit: Payables control account \$1,200
> - Credit: Receivables control account \$1,200
> - Remaining payables balance after set-off: \$600 (\$1,800 - \$1,200)
> - Receivables balance after set-off: zero (\$1,200 - \$1,200)
>
> **Exam Warning:**
> Be careful not to record the same contra entry in both ledgers without considering the correct direction of the set-off. Only the amount up to the smaller balance can be offset. Any unmatched balance will still require settlement through normal payment.

### DOCUMENTATION AND POSTING CONTRAS

When performing a contra entry, supporting documentation should be retained—such as statements from both parties showing the agreed balances and set-off. Proper authorisation is necessary and a clear audit trail must be maintained.

After posting a contra entry in the control and subsidiary ledgers, reconcile the control account balance to the total of individual ledger accounts to confirm accuracy. This is a key internal control in accounting systems.

### Worked Example 1.3

Scenario:
Gemini plc receives a supplier statement from Axis Ltd showing that Gemini owes \$800, and Axis Ltd also owes Gemini \$500 as a customer. They agree to offset.

Question:
What entry is made and what are the post-contra balances?

> **Answer:**
>
> - Contra amount is \$500.
> - Debit: Payables control account \$500
> - Credit: Receivables control account \$500
> - Post-contra, remaining balance: Payables (Axis Ltd): \$300 (\$800 - \$500), Receivables (Axis Ltd): \$0 (\$500 - \$500)

### LIMITATIONS AND GOOD PRACTICE

- Contra entries can only be made when both parties maintain current records and mutually agree the set-off amount.
- Remaining balances after set-off must be paid as normal.
- Regular reconciliation between control accounts and individual ledgers helps detect errors or omissions.

> **Revision Tip:**
> To check your work, always confirm that the receivables control account and the payables control account are both reduced by the same contra amount. One decreases by a credit, the other by a debit.

## Summary

Contra entries and set-offs allow for efficient settlement where businesses trade with each other as both customer and supplier. Recording these correctly ensures that accounts reflect only the true net amounts owed. Fully understanding this area is essential for the ACCA FA1 exam.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- Define the receivables ledger and control account
- Explain the concept and purpose of contra entries and set-offs
- Perform the correct double entry for contra transactions
- Update both receivables and payables ledgers with set-off entries
- Reconcile control accounts after contra entries

## Key Terms and Concepts

- Receivables ledger
- Receivables control account
- Contra entry
- Set-off
- Double entry


Receivables ledger and control account - Contra entries and set-offs