Paying invoice with credit note?

B

bayareamike

Guest
Hi,

I am caught in a weird situation with a partner company that we do business with. Because of the nature of our respective businesses, we invoice them for products we sell to them (they are a customer in that sense) and for certain services they render to us they invoice us (they are a vendor of services to our business in that context).

Now, due to recent financial hardships they have fallen behind in their payments to our invoices quite a bit. But because of services rendered by them, we now have some invoices from them we are are required to pay.

I would hate to pay them more money (payment on their invoice) when we are already owed quite a large amount (for which we invoiced them) and there is some likelihood of not getting paid or at best getting paid very late from them. However, at the same time, I would like to make sure we are not held liable for any delay in our payment to them.

Is there an instrument similar to a credit note/memo that we can pay them with, instead of with cash, which they can they apply to the monies they owe us? I mean, instead of writing them a check, can we issue them some kind of an instrument that credits them for the payment we owe them in a documented fashion and would be applied to reduce the amount they owe us?

It sounds like there should just be some way to document this type of adjustment but my accountant (not a very responsive one unfortunately) is not able to give me a straight answer.

Thanks in advance,

bamike
 
Im not an accountant, but ive seen clients who have offset creditors balances against debtors of the same account using some form of 'contra' journal. I think its quite standard way of doing this.
 
Yep. What Runner says is correct. You should be able to offset the entire as to what you owe them against the same amount they owe you. It's simple basic accounting. If you have a gut feeling that they are in trouble, there is little point in paying them. Offer them an offset. You didn't mention as to how old is their debt to you, versus vice versa.
 
What you're talking about is called a contra I think.

Eg:
Assuming Mr A is our debtor and he owed the company for $4,000 being goods supplied by the company to him.
However, the company also purchase goods from Mr A where the company now owed him for $5,000
How to do effect the contra entries:
We transfer $4,000 by debiting Mr. A’s account in the Purchase ledger and crediting Mr. A in the Sales Ledger.
The transfer will then appear on the debit side of the Purchase ledger Control Account and on the credit side of the Sales Ledger Control Account.
Accounting entries:
Debit: Mr. A ( Purchase Ledger a/c) $4,000
Credit: Mr. A ( Sales Ledger a/c ) $4,000
( The above is also being transferred to the respective control account)
Being offset of account
 
It may be wise to insert a clause in your contract that states you have the right to offset monies due to you.
Unless this is stated, the liquidator/receiver of the other company could have a case to follow you for money even though you "contraed" it.
There may even be a clause in the existing contract preventing offsetting of accounts. It's quite common.
 
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