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Confused by contras

  • 13 posts
  • # 70569

I am studying for Level III without the benefit of a course, so I am working through the Kaplan Advanced Bookkeeping text and kit. I am puzzled by one aspect of the Additional Question (Owen and Griffiths) on page 190 and I wonder if anyone with a bit more experience can help me. According to the question (point (a)(ii)) the sales ledger control account does not agree with the list of ledger balances in that a contra entry with the creditors ledger for £200 has been omitted from the control accounts. The answer deals with this by crediting sales ledger control £200 and debiting purchase ledger control £200.

My problem is that I don’t understand what how a contra entry of this type might arise, or what reason there might be for choosing to credit sales ledger and debit purchase ledger control rather than the reverse. Can anybody help me, please?
  • 3 posts
  • # 70578

Hie Chris,
 
A contra entry in this instance arises when we have a client who is both a debtor (debit balance) and a creditor (credit balance) in our books and instead of paying what they owe and requesting a payment for what is owed to them, they decide to offset one amount against the other. This offset has to be reflected in our books as a recept(reducing debtors) and as a payment (reducing creditors). Thus in the example you quoted we have to Dr Purchase ledger control(creditors) to show the payment and Cr sales ledger control(debtors) to show the receipt. I hope this anwers your question.
  • 60 posts
  • # 70580

Chris

This arises if a customer was also a supplier to the business. For instance if the company was a builder/decorator it may have a supplier that was a office stationers but at that time employed the business to refurbish its premises. By agreement the monthly office supplies account may have been offset against the invoice for the refurbishment.

If you think about the effect of the contra will be to reduce the amount owed to/by the business in the sales ledger and purchase ledger respectively. Therefore the need to credit sales ledger and debit purchase ledger.

I hope this is helpful
nikki1101
  • 48 posts
  • # 70594

Hi Chris i was thinking of studying for the level 3 the same way as you, would you suggest from your experience to do it this way or study through a course provider?
Thanks
  • 13 posts
  • # 70607

Many thanks to Adrian and sgc for their replies - that's a big help. I was struggling a bit, not having had any practical experience of the situation.

Nikki, it suits me very well to study from a book on my own, so long as the book is good and comprehensive and there are plenty of exercises to practise with. THat seems to be the case with the Kaplan books I mentioned, but the proof of the pudding will be in the eating - I'll let you know how I get on in the exam, which is imminent.

Some people may prefer to have pre-packaged lessons and deadlines set by a course provider, but personally I don't find that particularly helpful. With the Kaplan books you can simply work through the chapters in order.Obviously if you study on your own you won't have a tutor to turn to if you get stuck. However my experience with this question and this forum suggests to me that you can probably get as much help from other ICB members as you are likely to get from tutors if you come across a difficulty.

Best of luck!
  • 13 posts
  • # 70939

nikki1101 said:

“Hi Chris i was thinking of studying for the level 3 the same way as you, would you suggest from your experience to do it this way or study through a course provider?
Thanks”
Hi Nikki - well, it can be done. I passed today with 95%. I worked through the Kaplan Advanced Bookkeeping book, and the kit, and did all the practice questions in both. I also did a number of past papers downloaded from the Institute. I would say that it's important to do the online mock exam, because all the old papers are three hour paper based tests and the actual exam, like the mock, is a 2 hour computer thing where you don't have to worry about formatting your financial statements. It's a bit disconcerting at first if you've prepared in the way I did. Anyway, I don't think a course would have helped me any better - I expect they're all paper based like the Kaplan books and the old papers.

Good luck and don't forget to come back here if you need any help - I'll certainly do my best and I'm sure others will too.
gigagirl
  • 220 posts
  • # 70961

Well done Chris, that's a fantastic result.
I was also considering further study up to level 3 but wasn't sure whether the books would be enough.  I really don't have the money for another expensive course.  The Level 2 Comp course I did, I have since realised was considerably overpriced, and only half the exam fees were included, so I still had a fair bit to stump up for at the end.
I won't mention who the course provider was, but I'm sure many people on here will be able to guess.Wink
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