Contra Payments

[kristell]

Hi - I am hoping somebody can help me. I use TAS Basics as my accounting system which is great but I am stuck on one thing.

I have an organisation that I do a lot of work for. They pass me the jobs, I do the work, filling an invoice and they then pay me (eventually!!). They invoice me for monthly subscription and also for commission for each job they pass me.

I receive a payment from them (usually monthly) - on the remittance advice they put on all the payments to me and take off the monthly subscription and commission charges.

This all works well and my accounts system works like this:

Sales invoices - entered as normal sales invoices
Purchase invoices (from them) - enter as a normal supplier invoice. I have set up a separate bank account called 'Contra Payments'. I then enter the same purchase invoice as 'money in' to the Contra Bank Account as a customer receipt, then I make a supplier payment from the Contra Bank Account money out and allocate the money out to the same purchase invoice.

This all works very well as I said until I get to Credit Notes.

I have tried using the reverse format but it doesn't work and so I have a number of credit notes just sitting there waiting for something to happen to them.

The credit notes show up on the remittance advice so I am getting the money for them but just do not know how to 'account' for the credit notes!

Any ideas?

 

[KM-Tiger]

Are you VAT registered and using Cash Accounting?

 

[kristell]

Yes VAT registered
No cash accounting

 

[David Richards]

I think I've been answering your question on a different forum.

As I said there, when you're dealing with contra-entries for invoices, the objective is simple. They owe you money, you owe them money - offset one against the other so that you only have to pay the difference.

But when it's credit notes, it's slightly different. In fact I'd imagine it's not a very common situation. The fact that you have issued a credit note suggests that it relates to a specific invoice - so in order to keep track of what's going on, you would allocate the credit note(s) against the original invoice(s).

But from what you've described elsewhere, It doesn't sound like you need to contra credit notes at all. What you have is a situation when your supplier has issued a credit note and then refunded the amount of the credit note. So In Basics you enter the credit note as normal and then choose the 'Receive a refund' option, which you then allocate against the credit note.a

 

[kristell]

Yes - you are correct - I did ask on another forum - trying to get as much advice as possible!

It isn't me that is issuing the credit note - it is the customer/supplier who is. They are crediting the amount back to us on their remittance advice when they pay us as a customer. The amount the are crediting is relating to items they have incorrectly charged us for as a supplier.

I have to enter the credit note for VAT purposes as we have of course paid HMCR for the VAT element and now want to claim it back.

If I don't contra the credit notes then I don't know how to get rid of them out of my supplier's account record.

If I choose the Receive a Refund - will this not affect my 'bank balance'? Will my bank account not then expect to receive the actual refund?

It is really complicated but I am sure there must be a way round this!!

 

[David Richards]

It isn't me that is issuing the credit note - it is the customer/supplier who is.

Yes, that's what I was referring to when I suggested that "you enter the credit note as normal and then choose the 'Receive a refund' option, which you then allocate against the credit note."

They are crediting the amount back to us on their remittance advice when they pay us as a customer. The amount the are crediting is relating to items they have incorrectly charged us for as a supplier.

When you say they are "crediting the amount back to us on their remittance advice when they pay us" It sounds like they are refunding you the amount of the credit note. That is they are paying you more money than they would if they weren't "crediting the amount back to us on their remittance advice when they pay".

So is it like this?

• They invoice you
• You pay the invoice
• They realise that they've invoiced you too much and issue a credit note
• They refund the credit note by including the value in the next amount that they pay you (as a customer)

I have to enter the credit note for VAT purposes as we have of course paid HMCR for the VAT element and now want to claim it back.

It'll actually be the other way round. If you have an invoice from your supplier, then you'll have recovered the VAT due on it. The credit note means you'll actually be paying something back to HMRC as you will have recovered too much VAT.

If I don't contra the credit notes then I don't know how to get rid of them out of my supplier's account record.

As I said before. It doesn't seem like this is a contra-entry situation at all - merely a refunded credit note.

If I choose the Receive a Refund - will this not affect my 'bank balance'? Will my bank account not then expect to receive the actual refund?

It will. But from what you've described your supplier is adding the amount of the refunded credit note when they pay you (as a customer).

 

[kristell]

This is getting really confusing - this is the process.

They give us a job to do
we do the job
we send them an invoice

Each month we receive an invoice for a monthly subscription
Each month we receive an invoice for commission on each job passed to us (only those that they are actually paying us for - listed on remittance advice below)
Sometimes they pass us jobs which do not go through them and if we do the job then they charge us a 'referral' fee.

Each month we receive a remittance advice - this lists:

Jobs done - as credits
they debit from this the monthly subscription
they also debit from this the commission for each job they are paying us for
If any credit notes have been issued these will show up as credits on the remittance advice.

On occasions they pass us a referral job which we can not do and the agreement is that we do not pay the referral if we do not do the job. Sometimes they also mistakenly charge us commission on a job we have sourced ourself and when we point this out to them they then credit us.

They ALWAYS OWE US MORE THAN WE OWE THEM

Every month they pay us - we never pay them - their invoices are always deducted from their payment to us.




Sorry to have got the HMRC back to front - that is how confused I am :redface:


The receive a refund bit sounds like it could work - I do have money left over from the remittance advice if they have paid us too much - so how can I allocate the credit note to the left over funds - which could in fact be the refund and this would then not affect the bank account and would also not affect the VAT??

 

[David Richards]

Sorry, I don't think there's any way I can describe it without just repeating myself. So how about I do a made-up example to see if that helps you?

Let's say in January;

• You invoice them for three amounts of £500. So there is an unpaid balance of £1,500 on their 'customer' account (i.e. they owe you £1,500).
• They invoice you for £1,0000. So there is an unpaid balance of £1,000 on their 'supplier' account (i.e. you owe them £1,000).
• You both decide to contra the invoices (as described elsewhere) meaning you offset the £1,000 you owe them against the £1,500 they owe you. So there is now a zero balance on their 'supplier' account and an unpaid balance of £500 on their 'customer' account (i.e. they owe you £500).
• They issue you a credit note for £250, as they invoiced you too much. You enter this on their 'supplier' account meaning there is now a 'credit' balance of £250 on this account (i.e. they owe you £250).
• Overall, they now owe you £750.
• At the end of the month they send you a remittance advice and £750. The remittance advice details which invoices they are paying and which credit notes they are refunding. £500 relates to the unpaid invoice of £500 and £250 relates to the credit note they issued.
• You record two bank transactions. One for £500 to their 'customer' account to pay off the outstanding invoice. (Click Customers and select Receive a payment and allocate against the unpaid invoice of £500.) And one for £250 to their 'supplier' account to refund the credit note. (Click Suppliers and select Receive a refund and allocate against the outstanding credit note.)

And that's it. Everything balances.

 

[kristell]

You record two bank transactions. One for £500 to their 'customer' account to pay off the outstanding invoice. (Click Customers and select Receive a payment and allocate against the unpaid invoice of £500.) And one for £250 to their 'supplier' account to refund the credit note. (Click Suppliers and select Receive a refund and allocate against the outstanding credit note.)

This makes it clear for the future - thank you for that - just not sure what to do with the ones I already have in the account now :|

I do appreciate all the help you have given - and I know it has seemed I am awfully dim but you have been very patient with me so thank you.