If you have a customer who is also a supplier, you may sometimes have simultaneous, outstanding sales and purchase invoices with the same business. In Manager, all sales invoices are subaccounts of Accounts receivable, while purchase invoices are subaccounts of Accounts payable.
Example
You have a customer who owes you 1,000 from a sales invoice, as shown in the Sales Invoices tab:
At the same time you have made a purchase on credit for 200 from this same business (in its role as a supplier). The purchase invoice shows in the Purchase Invoices tab:
Instead of receiving money from the other business for your sales invoice while paying for the purchase invoice, you can offset the outstanding sales and purchase invoices, decreasing the amount due from your sales invoice by the amount of the purchase invoice. (Of course, if the purchase invoice is larger, you would be decreasing the amount owed from the purchase invoice by the amount of the sales invoice.) There are three methods you could use:
- Contra journal entries
- Offsetting receipts or payments
- Simultaneous credit and debit notes
The approaches produce slightly different financial results, because some only offset obligations, while one also records movement of money. They all have their own advantages and disadvantages.
Contra journal entries
It makes no difference whether the sales or purchase invoice is larger; the procedure is identical. To make an offsetting contra entry, go to the Journal Entries tab and click New Journal Entry:
In your journal entry, debit Accounts payable for the supplier by the smaller of the sales or purchase invoice balances. If the purchase invoice has a reference number, it can be selected. Otherwise, leave the Invoice field blank. Credit Accounts receivable for the customer and the sales invoice by the same amount.
Example
The smaller amount in the example above is the 200 purchase invoice. So a journal entry is created:
If there are more invoices, do not select invoice numbers. Instead, enter as the contra amount the smaller of the total Accounts payable or Accounts receivable balances for the other business. (Check these in the Customers and Suppliers tabs.) Manager will automatically offset outstanding sales and purchase invoices on the basis of oldest due dates. But still debit Accounts payable and credit Accounts receivable.
Example
After making the journal entry illustrated above, your purchase invoice will be marked as paid in full, even though your payment was actually via journal entry:
The balance due on the sales invoice will decrease by 200:
An advantage of this method is offsetting of obligations with a single transaction. A disadvantage is that a journal entry is only an internal record. You have no suitable transaction to send to the other business to document the effort. You must rely upon mutual agreement that the other business will make a corresponding adjustment in some way. You run the risk of misunderstanding, exchange of remittances based on the initial documents, and the need for potential refunds. Another disadvantage is that a separate transaction is still required to settle one of the invoices (if it was not completely offset).
Offsetting receipts or payments
If settlement of both the sales and purchase invoices involved is imminent, you can resolve the situation with a single receipt or payment form. This approach has the advantage of providing a legal transaction record to furnish the other business. It also accomplishes the process with a single transaction. It has the disadvantage of requiring slightly different entries depending on whether the sales or purchase invoice is larger.
Caution
This method can only be accomplished if the other business agrees to make or receive payment at the same time. Otherwise, you will have offset the invoices while the other business will not. This raises the possibility of confusion and means that your records will be incorrect until the other business takes corresponding action.
To use this approach, determine whether the balance due on the sales invoice(s) or purchase invoice(s) is larger. If the amount owed to you for the sales invoice(s) is larger than the amount you owe on the purchase invoice(s), go to the Receipts tab and click New Receipt (solid arrow). If the amount you owe the other business on the purchase invoice(s) is larger, to to the Payments tab and click New Payment (dashed arrow):
OR
On the receipt or payment entry screen post one line item to Accounts payable, the other business’ name as a supplier, and the relevant purchase invoice reference number. Post a second line item to Accounts receivable, the other business’ name as a customer, and the relevant sales invoice reference number.
Here is where procedures differ based on relative balances due of the sales and purchase invoices. If the form is a receipt (based on your selection above), enter the balance due of the sales invoice as a positive number, posted to Accounts receivable, and the purchase invoice balance due as a negative number, posted to Accounts payable. But if the form is a payment, reverse the signs, entering the sales invoice balance due as a negative number, posted to Accounts receivable, and the purchase invoice balance due as a positive number, posted to Accounts payable. See the table below:
Example
In the same situation described in the examples above, since the sales invoice balance due is larger than the purchase invoice balance due, a receipt is selected. The invoice balances are entered with signs as in the table above:
Because this method accounts for the actual movement of money, both invoices now show as being paid in full:
Note
If the sales and purchase invoices balances are identical, it does not matter whether you choose a receipt or payment. But the signs on entries must still follow the convention in the table above. A transaction in this situation is known as a zero-valued receipt or payment.
Simultaneous credit and debit notes
The final method involves more transactions than either of the other two. But it can be used without coordinating simultaneous settlement of the invoices with the other business. In that respect, it is similar to a contra journal entry. However, it can produce a recognizable accounting transaction to send to the other business. It is most useful when the balance of the sales invoice is larger than the balance of the purchase invoice.
If the balance of the sales invoice is larger, issue a credit note to the other business (as a customer) for the balance of the purchase invoice. At the same time, issue yourself a debit note from the other business (as a supplier) for the balance of the purchase invoice. This will reduce the amount the other business owes to you, regardless of when they settle the sales invoice. And it will reduce the amount you owe on the purchase invoice to zero.
If the balance of the purchase invoice is larger, issue a credit note to the other business (as a customer) for the full balance of the sales invoice. Issue yourself a debit note from the other business (as a supplier) for the balance of the sales invoice, This will reduce the balance the other business owes you to zero and the amount you owe on the purchase invoice by the amount of the sales invoice.
Example
Using the same example as before, since the sales invoice balance is larger, a credit note is issued for the 200 balance of the purchase invoice. The balance due on the sales invoice decreases to 800. A debit note is created for the same 200 balance of the purchase invoice. The balance due on the purchase invoice decreases to zero. The balance due on the sales invoice can be received whenever the other business pays.
Note
Often, a debit note is created in response to a credit note received from a supplier. But debit notes can also be created in response to less formal communications with a supplier, such as an email or telephone conversation. You should coordinate with the other business to determine what procedure will be followed. When a formal credit note will not be sent, good practice is to document the debit note in some fashion.
Summary
Contra journal entries adjust obligations in a single transaction. But they still require a receipt or payment to record the movement of money. And they cannot provide a recognizable transaction document to another business.
Offsetting receipts or payments accomplish everything with one transaction. But they require close coordination with the other business.
Simultaneous credit and debit notes give freedom to both businesses, document the transactions well with recognizable accounting records, but still need a separate receipt or payment when money is moved.