If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming. In order to balance the journal entry, a debit will be made to the bad debt expense for $4,000. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense.
The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold. For example, assuming an entity receives a Cheque from a debtor and is deposited into the bank account, it’s not a contra entry. Entities maintain petty cash accounts to pay for nominal expenses like Refreshments (Snacks, Tea), Periodicals, Stationery etc. These small (in monetary value) expenses are spent from the Petty cash GL.
What do you mean by contra entry?
The amount is reported on the balance sheet in the asset section immediately below accounts receivable. The net of these two figures is typically reported on a third line. Mr Hero has two bank accounts and must maintain a minimum balance at the end of each month.
Note that the Balance Sheet is not affected with the result of the above entry as the cash flow is between two asset accounts. Add contra entry to one of your lists below, or create a new one. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. Therefore, the transfers between Cash and bank shall belong to the same person/entity so that we can call this entry as a contra. Let’s see a couple of transactions and determine if those fall into this Category.
What is Contra Entry in accounting?
For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately. The transaction involves the transfer from one bank account to another relating account. The above amount is recorded in the bank column (debit) side of the double column cash book. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. As a general practice, all the cash and bank transactions are recorded at Cash and Bank GL. It does not mean that we shall not maintain a Cash Account and Bank Account separately.
- We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R).
- For example, Accumulated depreciation is the contra account for the fixed asset.
- Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance.
So, there will not be any change in the higher-level account balance. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. This allows for the easy determination of historical costs. This is particularly important for contra asset accounts.
Everything You Need To Master Financial Modeling
For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets. A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity). The transaction between Cash and bank account is to be relatable. For example, Consider the transaction where I am depositing my Cash in hand into a friend’s bank account, and that is not a contra account. The net effect reduces the cash balance (Cash and Bank GL) from you or your business. The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet.
In the cash column, it is recorded in the credit side of the same cash book and in particular it is written as “Bank account”. If cash is taken from the bank, due to business purposes then contra entry is made. If cash is taken for personal use, then it is recorded in the credit side of the bank column of the cash book. However, that $1.4 billion is used to reduce the balance of gross accounts receivable. Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount. For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account.
However, we need to record all the financing transactions. For suppose the balance is moved from Bank A to Bank B. If the contra entries are not recorded, the bank balances will not agree to the bank statements. However, it agrees at the Cash and Bank Financial statement line-item level. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account.
Transfer from Cash Account to Cash Account
If the Bank Account from which Cheque is being deposited is drawn and the bank account in which the Cheque is deposited relates to the same entity, it’s a Contra entry. There is no change in the balance at the parent level (Financial Statement Line item – Cash and Bank Account). Said differently, there is no inflow or outflow of funds in the business. We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R).
In the above example, both entries, debit, and credit, are a contra entry of each other, they both offset each other. The narration is not required for such an entry and only a “C” is written in the left column which depicts that it is a contra entry. Debit and credit aspects of a single transaction are entered in the same account but in different columns.
- Therefore, for these three, the debit balance actually represents a negative amount.
- The difference between an asset’s balance and the contra account asset balance is the book value.
- For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account.
A contra liability is an account in which activity is recorded as a debit balance is used to decrease the balance of a liability. The balance of a contra liability account is a debit balance. Contra Liability a/c is not used as frequently as contra asset accounts. It is not classified as a liability since it does not represent a future obligation.
Contra Account Examples
These entries are not recorded in ledger accounts because both aspects (credit and debit) are in double column cash books. Letter “C” is written in the posting reference column which represents contra entry. Specially use for either cash deposite in bank or cash withdraw from bank. In these, accounting entry are recorded in to both debit and credit side of cashbook is known as contra entry. Money taken from office (cash) and deposited in bank − When amount is deposited in bank then it is recorded in the debit side of bank column of cash book.
These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities include discount on notes or bonds payable.
Contra Account Definition, Types, and Example
Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts reduce accounts receivable, while accumulated deprecation is used to reduce the value of a fixed asset. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean.
