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ACCA Applied Knowledge · Financial Accounting · Receivables and payables

Tarn Co has a customer, Vale, who is also a supplier. At the year end, Vale's balance in the receivables ledger is $8,400 debit and in the payables ledger is $3,150 credit. Tarn agrees to set off the balances. Which journal is correct?

Debit Payables control $3,150 and credit Receivables control $3,150. A contra offsets the smaller of the two balances, leaving Vale owing a net $5,250, and no cash moves.

  1. ADebit Payables $3,150; credit Receivables $3,150Correct
  2. BDebit Receivables $3,150; credit Payables $3,150
  3. CDebit Payables $8,400; credit Receivables $8,400
  4. DDebit Cash $3,150; credit Receivables $3,150

Explanation

A contra entry offsets the lower of the two balances: $3,150. Debit the payables control account to remove the liability and credit the receivables control account to reduce the asset. Net, Vale owes $5,250. Option 3 uses the larger balance, which would wrongly overstate the set-off.

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