There may be a customer, who also a supplier, it may come the need to cancel out any monies owing to the customer against monies that might be owed to them. It is possible to do this by posting adjustments to both the customer & the supplier.
In the Nominal Ledger create a Nominal Account for Contra Entries (suggested Major Heading of 12).
In the Sales Ledger create an Analysis Code for Contra Entries – it is suggested that this is set up as a Discount Analysis type and must debit the Contra Entries Nominal Account and credit the Sales Control Account.
In the Purchase Ledger create an Analysis Code for Contra Entries – it is suggested that this is set up as a Discount Analysis type and must debit Purchase Control Account and credit Contra Entries Nominal Account.
There are articles on how to make the edits mentioned above in related articles.
Example: A customer owes £300.00, however, you also owe them £100.
In the Sales Ledger enter an adjustment to Decrease Customer Balance for £100 using the Contra Analysis code (this will reduce the balance on the Customer Record and the Sales Control Account).
In the Purchase Ledger enter an adjustment to Decrease Supplier Balance for £100 using the Contra Analysis code (this will reduce the balance on the Supplier Record and the Purchase Control Account).
The balance on the Contra Entries Nominal Account will be 0.00 as the two entries will have cancelled each other out.
There will be no effect on the VAT Control Account as VAT is still chargeable on both the Sales and Purchase Invoices.