Contra payments

You and I apparently don't use the term "contra account" the same way. As I understand the term, contra accounts are pairs of accounts of the same type, one normally with a debit balance and the other normally with a credit balance. Two common balance sheet examples:

- Fixed Asset Cost, Accumulated Depreciation. Both are "Fixed Asset" accounts, one is NOT a Liability.

- Accounts Receivable, Allowance for Doubtful Accounts. Both are Current Liability accounts, one is NOT a Liability.

In the Income Statement, some organizations account for recovered expenses as a contra-expense account, others as an income account. The choice may have tax implications, but otherwise it's probably a matter of management preference in most circumstances. In most circumstances (other than cash retail sales for example) receiving a payment doesn't make it income, issuing an invoice (or Sales Receipt in QuickBooks) makes it income. Nor is a cheque automatically an expense - not if it is paying a liability, for example.

Consult with senior financial management in your organization or with your public accountant for clarification of your issues and your organization's policies.

Contra accounts (the majority of the time) are when an entity is both a customer and a vendor. The "contra" occurs when a payment is required and no money exchanges hand For example, a customer owed you money and you owe the customer money. The customer could state to apply the amount you owe it against the monies the customer owed you. Payments exchange via a "contra" payment.

How I handle this is to setup a bank account called "Clearing Account". I make a "bill payment" using this chequing account to record the payment of the vendor invoice. I would then record "receive payment" through the same account to record the other side of the transaction. The net effect in your "Clearing Account" is zero. The vendor invoice is recorded as paid and the customer invoice is recorded as paid.

I am not too clear on what you are trying to accomplish? There are two sides to every entry. If you received money you would have debited your bank account and credited another account. If the payment deposited was in error and you wished to write a cheque for the amount, you would credit your bank account and debit the same account you used when you received the money.

Cathy

!-! wrote:

Thanks !-! and Cathy

Yes, my terminology may not be correct, but you have both latched onto my problem which was not a good example.

Thanks for taking the time to explain the standard way of handling "contra" accounts. Your clear and concise explanations are a great help to me as I re-familiarise myself with Quickbooks and accounts.

Kind regards

Ivan Joyce

I wonder if I can use something like this technique to handle the check my brother just wrote to pay his and my mother's bill? Maybe transfer the credit on his bill through a "Clearing Account" to pay my mother's bill?

Or is there a simpler way?

Sure you can. The alternative - recording it as 2 separate checks - may be simpler but doesn't reflect what actually occurred, so in my opinion is not a good method.

"Phil Nels> I wonder if I can use something like this technique to handle the > check

In case anyone is interested, I invoiced My (rich) brother for the amount of Mom's invoice. I had to create an item in the amount of Mom's invoice, which I gave an account type of "other charge", a tax code of "non" and an Account of "Clearing Account" (as below).

Then I used the credit from my brother's overpayment to pay the invoice.

Then I used the register to created a deposit in the clearing account (In my Mom's name) to match the payment. I gave the account as "Accounts Receivable". Then I paid her invoice with the credit that now showed on her account.

I don't really know if it's right (many of the choices above are guesses), but the accounts all have 0 balances now.

I don't understand why the clearing account went negative when I put my brother's payment in and why I had to use a "dep" type on the transaction to my mother's account to balance out. I thought it should be the other way round. I guess I don't understand accounting.

If anyone knows a better way to handle this situation in Quickbooks Pro 2005, I would love to hear it.

!-! wrote:

Assuming that you receive one check (check no. xxx) in payment of invoice No.1 for brother and payment of invoice No.2 for mother. Why not split the check into two transactions in the "Payments Received" window

Received from Brother Mother

Amount yyy.yy zzz.zz

Date today today

Pmt method check check

Reference No. xxx xxx

Memo for brother Check No. xxx received from brother in amount of www to pay this invoice and mother's invoice No. mmm

Memo for mother Check No. xxx received from brother in amount of www to pay his invoice No. nnn and this invoice

If you use the same check number for both payments on the same "payments to deposit" the deposit slip printing will merge the two payments together and only show one check on the deposit slip. This method saves all of the extra entries and shows the deposits in the deposit register.