Understanding and accounting for trade contras 

In a situation where one of your customers is also one of your suppliers you will end up with both bills and invoices to and from each other.

When this happens you may choose to pay the difference between the two sets of invoices, the remaining invoices which net off against each other are called a trade contra.

For example:

1) Your company (A) : You have invoiced a customer for £1000

They have invoiced you as a supplier for £500

Therefore their accounts will be equal and opposite to yours:

Their company (B) : They have invoiced you as a customer for £500

You have invoiced them as a supplier for £1000

So how do you account for this type of transaction properly?

Trade Contras 1

2) In theory you could simply pay each other to the value of what is owing, however this will simply result in you receiving £1000 and paying £500, a net of £500 received. What would then happen if you paid your £500 but they did not pay their £1000?

3) What you can instead do, providing you arrange this with the other company so that your account statements match, is net off £500 of your invoices against £500 of their bills.

Your company (A) : You have invoiced them for £1000 (- £500 of the bills)

You receive £500

Their company (B) : They have invoiced you for £500 (- £1000 of the bills)

They pay £500


So what happens with the £500 of bills you don’t pay in cash?

1) Start by setting up a “Trade Contras” account. From your chart of accounts set it as either a current asset or current liability – essentially the final aim is that this account should net to zero but setting it as a balance sheet account makes it much more transparent and does not affect your profit and loss figures.

If you use Xero – set this account to the Dashboard Watchlist and Enable Payments to this Account.

Trade Contras 2


2) What you can do in this situation is add a payment of £500 of the bills to the”Trade Contras” account

Trade Contras 3

3) If you return to your Xero dashboard you will see that the trade contras account has a balance. This means you will need to enter the second half of the trade contra to net it to Zero


4) Now add a payment £500 of the invoices to the same “Trade Contras” account.

Trade Contras 5

5) This means that the net balance of your “Trade Contras” account should always result as £0


6) This marks the invoices as being paid, keeps your income and expenses as they should be and accounts for the invoices correctly without needing the uneccessary cash movements.

Trade Contras 7

7) It also means that you can keep track of your trade contras, if the account balance is not £0 you may be missing part of the contra, as there should always be an equal and opposite payment of an invoice to match against.


Why might you think of doing this?

Trade contras are a great way of reducing each company’s risk, you don’t have the risk of paying off your bills without receiving payment for your invoices and you can reclaim the input tax against the output tax. You can also reduce the impact on your cash flow as less cash will be exchanged between each company.

Contras can also be a great way to resolve a disputed invoice, it may be that rather than exchanging cash you could contra off the invoices – it also means that you have more chance of resolving the matter as each company will have equal leverage and risk, meaning they may be more inclined to discuss this in order to reach a mutual agreement.

If you have any queries on you trade contra transactions, please log a support call with [email protected].


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