The following transactions occurred in the business of Kwame during March 2025. Date Transaction 3 Mar Sold goods on credit to Peters for $5 200 7 Mar Purch...
Question 1 Report
The following transactions occurred in the business of Kwame during March 2025.
| Date | Transaction |
|---|---|
| 3 Mar | Sold goods on credit to Peters for $5 200 |
| 7 Mar | Purchased goods on credit from Peters for $1 800 |
| 10 Mar | Set off the amount owed to Peters against the amount owed by Peters (contra entry) |
| 15 Mar | Peters paid the remaining balance by cheque |
| 20 Mar | Purchased a motor vehicle for $18 000 on credit from ABC Motors |
| 25 Mar | Paid ABC Motors $8 000 by cheque and the balance by a promissory note |
(a) Write up the account of Peters in the books of Kwame. Balance the account after each transaction. [8]
(b) Show the journal entry for the contra entry on 10 March. [3]
(c) Explain what is meant by a contra entry and why it is used. [4]
(d) Write up the ABC Motors account in the books of Kwame. [5]
Answer Details
(a) Peters Account in the books of Kwame
Peters is both a trade receivable (customer) and a trade payable (supplier) of Kwame's business. On 3 March, Kwame sold goods to Peters on credit, making Peters a debtor. On 7 March, Kwame purchased goods from Peters on credit, making Peters a creditor.
| Dr (Peters) | Cr (Peters) | ||||
|---|---|---|---|---|---|
| Date | Details | $ | Date | Details | $ |
| 3 Mar | Sales | 5 200 [1] | 7 Mar | Purchases | 1 800 [1] |
| 10 Mar | Set-off / Contra | 1 800 [1] | |||
After the contra entry on 10 March, the debit balance on Peters' account is:
$5 200 - $1 800 (purchases) - $1 800 (contra, but the contra cancels the $1 800 payable by transferring it from the credit side)
More precisely: the $1 800 owed to Peters as a supplier is set off against the $5 200 owed by Peters as a customer. The net amount Peters owes is $5 200 - $1 800 = $3 400. [1]
| Dr (Peters) continued | Cr (Peters) continued | ||||
|---|---|---|---|---|---|
| Date | Details | $ | Date | Details | $ |
| 3 Mar | Sales | 5 200 | 10 Mar | Contra (set-off) | 1 800 [1] |
| 15 Mar | Bank | 3 400 [1] | |||
| Total | 5 200 | Total | 5 200 | ||
The account closes to nil [1] after Peters pays the remaining $3 400 by cheque on 15 March. [1]
(b) Journal entry for the contra entry on 10 March
| Account | Debit ($) | Credit ($) |
|---|---|---|
| Trade payables (Peters) | 1 800 [1] | |
| Trade receivables (Peters) | 1 800 [1] | |
| Set-off of amount owed to Peters against amount owed by Peters [1] | ||
(c) Contra entry explained
A contra entry is used when the same person is both a debtor (trade receivable) and a creditor (trade payable) of the business. [1] The smaller balance is set off against the larger balance. [1] This avoids the unnecessary exchange of cash between the two parties for amounts that cancel each other out. [1] Only the net amount remaining needs to be settled in cash. [1]
(d) ABC Motors Account in the books of Kwame
| Dr (ABC Motors) | Cr (ABC Motors) | ||||
|---|---|---|---|---|---|
| Date | Details | $ | Date | Details | $ |
| 25 Mar | Bank | 8 000 [1] | 20 Mar | Motor vehicle | 18 000 [1] |
| 25 Mar | Promissory note / Notes payable | 10 000 [1] | |||
| Total | 18 000 | Total | 18 000 | ||
The account closes to nil. [1] The credit entry records the liability to ABC Motors for the vehicle. The debit entries record the two forms of payment: $8 000 by cheque and $10 000 by promissory note. Correct format and balancing. [1]
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