Sometimes you buy from a supplier that is also a customer of yours. So you owe them money and they owe you money. On occasions your supplier may want to pay you by performing a contra transaction.
What is a contra transaction? This is when you only pay or receive the difference between what you owe them and they owe you.

Example:
Your customer (also a supplier to you) owes you €10,000
You owe your supplier (also a customer of yours) €10,100

If you give your supplier a cheque for €100 and contra the €10,000 both accounts will now be cleared. Your supplier is paid in full and you are paid in full.

But is not swapping cheques not just the same thing?
Yes it is, you give your supplier a cheque for €10,100 and they give you a cheque for €10,000. The net difference is €100.

So why not just swap cheques?
If your customer does not have the money in his bank to write a cheque for €10,000 or you don't have the money in your account to pay out €10,100. The time between you lodging the cheque in your bank account your supplier gives you and it getting cleared through the banking system may mean that for a short period of time there are insufficient funds in your bank account to meet any cheques you write. So by doing a contra transaction it only affects your cashflow by €100.Contra's are also good for getting slow payers that owe you money and you owe them money, to force them to pay you. No cash is involved but the contra effectively means you have got paid and you have paid the supplier.

Some businesses when they see a customer in trouble and may not be able to pay their bills, they buy more goods from their supplier to protect themselves in case this customer (also a supplier) goes bust. As they can contra what they are owed against what they owe, so the bad debt may not be as big or not exist at all.

So contra's are a way of paying bills or being paid with very little cash actually swapping hands. It only works when one of your suppliers is also one of your customers.

Not all accounts software has contra transactions, so you may have to use the journal function to perform a contra transaction. You may also have to set up a contra control account in your nominal ledger. Talk with your accounts suppliers support department on how to do contra's.

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(c) Nilsson Denver Ltd 2008