Pros and Cons of A/R & A/P Contra Accounts
In the accounting scenarios above, by creating a contra account between payables and receivables, both of my businesses show an existing asset and a liability. While my bookkeepers at both businesses may send out Accounts Payable statements each month to one another, it’s really up to me whether I want to actually exchange cash or allow the debits and credits to offset themselves. Because both of my companies have equal amounts due and owed, there really is no benefit as far as cash received. What is not included in the equation is the cost of the sale, which turns into an expense for each company that will never be recovered unless cash exchanges hands.
On the positive side, you can also create a contra account for payables and receivables in a bartering situation.
For example, say my IT guy George wants to have his truck’s transmission repaired but he doesn’t have the cash of $1,000 needed to pay for the repair. On my side, I need a new computer, but I also don’t want to spend needed capital on a purchase:
In the above screenshot, while I’m fixing George’s vehicle and he’s giving me a new computer, I have both a receivable and a payable that offset one another, even if no cash was exchanged. In this very simple example, at accounting month or year end, my books will still balance. Creating a contra account for payables and receivables in a bartering situation is advantageous to both parties who have something to offer, but no real cash. These transactions, however, must appear on the books because I now own a piece of equipment that is an asset and will depreciate. By crediting the accounts payable and debiting the accounts receivable for Computer George, they offset each other and will not make my books out of balance. Again, this simple example does not allow for cost of sales for educational purposes.
Using contra accounts for payables and receivables can be a good thing in a bartering situation or a hindrance if you own more than one company that both utilize one another’s services but receive no real cash because both your accounts payable and receivables continue to grow and in some situations may have to be explained to a lender.
Screenshots: Created by and courtesy of author.