Titan Heavy Manufacturing sells steel components to BuildCo for $15,000. BuildCo also supplies Titan with specialized lubricants costing $4,000. They agree to a contra settlement to offset the balances. What is the correct double-entry in Titan's general ledger to record this contra settlement?

Answer options:

Debit Receivables Ledger Control Account $4,000; Credit Payables Ledger Control Account $4,000

Debit Payables Ledger Control Account $4,000; Credit Receivables Ledger Control Account $4,000

Debit Payables Ledger Control Account $15,000; Credit Receivables Ledger Control Account $15,000

Debit Cash $4,000; Credit Receivables Ledger Control Account $4,000

How to approach this question

Determine which balance is smaller, and reduce both the Receivables and Payables control accounts by that amount.

Full Answer

B.Debit Payables Ledger Control Account $4,000; Credit Receivables Ledger Control Account $4,000✓ Correct

A contra entry offsets a balance owed to a supplier against a balance due from the same entity as a customer. The offset is always for the smaller of the two balances ($4,000). To reduce the payable (liability), we debit the Payables Ledger Control Account. To reduce the receivable (asset), we credit the Receivables Ledger Control Account.

Common mistakes

Reversing the debit and credit, or using the higher amount ($15,000) for the contra.

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