What is a contra in accounting?

In bookkeeping, a contra is the settlement of a receivable and a payable with the same counterparty against each other, so that only the difference changes hands. A business that has invoiced a customer US$50,000 and owes it US$30,000 can agree a contra, clear both ledgers by journal and collect US$20,000. It is a different thing from a contra account, such as accumulated depreciation, which offsets another balance in the same books.

Can a customer set off what it is owed against an invoice that has been financed?

Generally yes. A financier that takes receivables by assignment or as security takes them subject to the customer's defences and to set-off arising from the same contract, and to other cross-claims that arose before the customer was given notice of the financing. Under a confidential facility customers are usually not told, so the right to deduct can keep growing. A signed waiver of set-off from the customer can change the position, depending on the governing law, the waiver's terms and whether the business is insolvent.

Why do invoice financiers exclude contra debtors?

Because the financier lends against cash it expects to collect, and a customer that is also a supplier may pay only the difference, or nothing until its own invoices are paid. The counterclaim sits on the purchase ledger, which the financier sees less often than the debtor ledger, and it tends to grow when the business is short of cash and paying suppliers late. Excluding the account, or lending only against the net balance, keeps the advance in line with what the customer will actually pay.

How do lenders find contra accounts?

By comparing the sales ledger with the purchase ledger by name, bank account and company number, and by asking. Audits look for related companies as well as the customer itself, since a supplier in the same group can create the same counterclaim. Many facility agreements require the business to disclose any customer it also buys from and to report contra balances on each borrowing base certificate. An undisclosed contra found at audit is read as a reporting failure, not only as an eligibility point.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Contra Debtor: a Worked Example

A customer you also owe will pay you only the difference.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07

// THE SHORT ANSWER

When a financier finds the same name on a business's sales ledger and its purchase ledger, it asks how much of that customer's debt will actually arrive as cash. Usually less than the invoices say. The customer holds a counterclaim for what it has supplied, can generally deduct it when it pays, and in a dispute may hold back payment until it is paid itself. So the financier lends against the net balance, sets a reserve against the account, or leaves it out of the borrowing base, and checks the purchase ledger at every certificate because the counterclaim moves.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

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// 01 — WHY A LENDER DISCOUNTS A TWO-WAY ACCOUNT

An invoice finance facility lends against the expectation that each customer will pay what its invoices say. A customer that also sells to the business breaks that expectation quietly. It owes money on one ledger and is owed money on the other, and when it pays it can take what it is owed off the top. In good times the difference is settled by agreement. The risk appears when the business runs short of cash and starts paying suppliers late: the contra customer is one of those suppliers, and it is also a customer the financier is relying on.

The law backs the customer. A financier that takes receivables by assignment or as security generally takes them subject to the customer's rights against the business. In Australia, section 80 of the Personal Property Securities Act 2009 makes the transferee's rights subject to defences and set-off arising from the contract itself, and to other claims that accrued before the customer's payments to the business stopped discharging the debt, broadly once it has been given notice. Section 102 of New Zealand's Personal Property Securities Act 1999 is to similar effect, and in the UK an assignee takes subject to the equities. Under a confidential facility, where customers are not told, those cross-claims can keep accruing. If the business goes into liquidation, mutual dealings are netted under each market's insolvency set-off rule: section 310 of New Zealand's Companies Act 1993, section 553C of Australia's Corporations Act 2001 and rule 14.25 of the Insolvency (England and Wales) Rules 2016. How those rules sit beside a financier's assignment or security interest is not settled in every market.

// 02 — HOW A FINANCIER FINDS AND COUNTS IT

The aged debtors report shows what customers owe; it does not show what the business owes them. A financier's audit matches the sales ledger against the purchase ledger by name, bank account and company number, and looks for related companies too, because a supplier in the customer's group can create the same counterclaim. Many facility agreements oblige the business to disclose any customer it also buys from and list contra balances among the ineligible items.

Contra exposure = the lower of the customer's debt and what the business owes it

Net approach: eligible = customer's debt − contra exposure

Exclusion: eligible = nil for the whole account

Reserve: eligible = customer's debt, less a reserve the financier sets

The net approach suits a counterclaim that is small, steady and settled regularly. Exclusion suits one that is large, growing or disputed, or a customer that has already deducted without agreement. A reserve sits between the two. Which method applies is a term of the facility, agreed deal by deal.

// 03 — THE EXAMPLE

A meat processor, constructed for this page like every figure in it, has a debtor ledger of US$5.2m financed under a confidential invoice discounting facility at an advance rate of 80%. Its largest customer, a food distributor, owes it US$620,000. The same distributor provides the processor's cold storage and freight, and is owed US$410,000 for them. The advance rate and the balances belong to the example. In US$ thousands:

Lent against in full: 620 × 80% = 496

Net of the contra: (620 − 410) × 80% = 210 × 80% = 168

Account excluded: = 0

Three months later the processor is under pressure. It has kept its other suppliers current but let the cold-storage bills run, because the distributor is a customer and seemed unlikely to press. The distributor's invoices now total US$560,000; what it owes the processor is still US$620,000.

Net of the contra: (620 − 560) × 80% = 60 × 80% = 48

Advance not backed by expected cash, if lent in full: 496 − 48 = 448

The account that supported US$496,000 of borrowing on the gross reading now supports US$48,000 on the net one. The fall came from the purchase ledger, which the borrowing base certificate does not show, and it came because the business was short of cash. A financier lending against the gross debt would find out when the distributor paid US$60,000 against invoices of US$620,000.

// 04 — HOW IT DIFFERS FROM DILUTION

Dilution is the shrinkage of the invoice itself: credit notes, returns, rebates and disputes that reduce what the customer owes for the goods it bought. A contra leaves the invoice intact and reduces the cash through a second trading relationship running the other way. The remedies differ. Dilution is measured from history and covered by the advance rate or a dilution reserve. A contra is measured from the purchase ledger at each certificate, and can move fast, as the example shows.

It is also distinct from customer concentration, though the two often arrive together: a large customer that also supplies the business is both, and a concentration limit applied to the gross balance overstates what the account is worth. Cross-ageing is a third rule that can bite on the same account, triggered by late payment rather than by a counterclaim.

DEFINED IN ONE PARAGRAPH → · ELIGIBLE RECEIVABLES → · PRODUCT FILE · INVOICE FINANCE →

// 05 — WHERE IT DECIDES A FILE

It decides the size of the facility at the start, when the audit finds the contras and the financier agrees with the business how each will be treated. It decides the monthly certificate, because a contra measured once and not again is a deduction that goes stale. And it decides the negotiation when a large contra customer is central to the business. A financier may count the account in full if the customer signs a waiver of its set-off rights. In Australia section 80(2) gives effect to an account debtor's enforceable agreement not to raise its defences; elsewhere its effect turns on its wording, and it may not hold against insolvency set-off if the business fails.

Buying from customers is normal in many industries. The lender's reading is simply that the question is not what the customer owes but what it will pay, and that the answer sits on a ledger the facility was not built to watch.

BORROWING BASE CERTIFICATE → · HOW BANKS ASSESS A WORKING CAPITAL REQUEST →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Commonwealth of Australia, Personal Property Securities Act 2009 (compilation as at 1 January 2021) — section 80 — Makes a transferee's rights subject to the account debtor's contract, defences and set-off, and to other claims accrued before payment to the transferor stops discharging the debt, with subsection (2) giving effect to an agreement not to assert defences — sections 01 and 05.
UK Government, The Insolvency (England and Wales) Rules 2016 — rule 14.25 — Sets off the sums due from mutual dealings between a company in liquidation and a creditor, leaving only the balance to be proved or paid — section 01.

// QUESTIONS PEOPLE ASK

What is a contra in accounting?: In bookkeeping, a contra is the settlement of a receivable and a payable with the same counterparty against each other, so that only the difference changes hands. A business that has invoiced a customer US$50,000 and owes it US$30,000 can agree a contra, clear both ledgers by journal and collect US$20,000. It is a different thing from a contra account, such as accumulated depreciation, which offsets another balance in the same books.
Can a customer set off what it is owed against an invoice that has been financed?: Generally yes. A financier that takes receivables by assignment or as security takes them subject to the customer's defences and to set-off arising from the same contract, and to other cross-claims that arose before the customer was given notice of the financing. Under a confidential facility customers are usually not told, so the right to deduct can keep growing. A signed waiver of set-off from the customer can change the position, depending on the governing law, the waiver's terms and whether the business is insolvent.
Why do invoice financiers exclude contra debtors?: Because the financier lends against cash it expects to collect, and a customer that is also a supplier may pay only the difference, or nothing until its own invoices are paid. The counterclaim sits on the purchase ledger, which the financier sees less often than the debtor ledger, and it tends to grow when the business is short of cash and paying suppliers late. Excluding the account, or lending only against the net balance, keeps the advance in line with what the customer will actually pay.
How do lenders find contra accounts?: By comparing the sales ledger with the purchase ledger by name, bank account and company number, and by asking. Audits look for related companies as well as the customer itself, since a supplier in the same group can create the same counterclaim. Many facility agreements require the business to disclose any customer it also buys from and to report contra balances on each borrowing base certificate. An undisclosed contra found at audit is read as a reporting failure, not only as an eligibility point.

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THE GLOSSARYIN ONE PARAGRAPHContra debtor (contra) What is a contra debtor in invoice finance, and why is it excluded?