What does someone settle? Debts usually, right?

In everyday business you’d settle receivables with payables if you have them with the same party. There’s no real point in you paying the company B a certain sum and then the company B paying you effectively the same money back. It’s a wasted time, bank charges etc. Instead, agree on a settlement – settle both party’s balances and see where the net result ends up, who has to pay to who. 

However, when settling, make sure you have a signed agreement, or at least written agreement (in most legislations it can be electronic as well). For your accounting purposes you must have a base document for each entry and without any consent from the opposing party how can you really say you had grounds for settling the balances?

Settling is something that can be a regular thing and as such, requires either a signed framework or common practice with some form of consent. Consider your supplier who are also your clients and vice a versa – maybe you’d want to discuss settlement agreements with them?