contra entry

A contra entry is an entry that is recorded when both the debit and credit affect the same account and which results in a net-zero effect on the account. These transactions are recorded between bank and cash accounts. Read more to have a deep understanding of the contra entry and how it can be recorded. 

Contra Entry definitions

Contra entry is defined as the transactions that involve cash and bank account. Contra entry is also known as contra vouchers. In simple words, we can say that contra entry is any transaction involving a transfer of cash between two cash accounts or between a cash account to a bank account or even between a bank account to another.

Contra Entry examples

Below you can see some of the examples of contra entry.

  1. Transferred cash to petty cash – INR 2,500 is a contra entry as it affects two accounts, the cash account, and the petty cash account
  2. Cash withdrawn from bank for office use – INR 2,500 is a contra entry as the transaction affects both cash and bank account.
  3. Deposited INR 12,000 to the bank account is a contra entry as it affects two accounts, the cash, and the bank account.

Other examples which are not contra entry are as follows:

  1. Received cheque from Mr. A 6,000 and paid into the bank – this is not a contra entry as only bank account is affected here, not the cash account
  2. Purchased stationery for INR 2500 – this is also not a contra entry as only the cash account is affected 
  3. Paid rent by cheque of INR 2000 – not a contra entry since the transaction only affects one account which is the cash account

After comparing the example of contra entries and non-contra entries, you will have a clear-cut idea about how a contra entry is formed and when a contra entry should be recorded in the books.

How do you enter Contra Entry?

If the contra entries are recorded traditionally, then a cash book with two columns namely cash and bank is prepared. Both the aspects of the transaction should be entered in the same book which is known as the Contra Book. 

Now when you enter the contra entries, in the debit side of the contra book, you must enter – To Cash a/c which should be under the particulars column. Then the amount will be noted in the bank column. 

On the credit side of the book, you must enter – By Bank a/c under the particulars column. This amount will be entered in the cash column. 

All the contra entries are denoted by the letter C in the L.F column on both sides of the cash book. These days a majority of the business uses accounting software to make the work simpler and accurate. If accounting software like myBillBook is used, then the transactions are posted automatically into the applicable ledger.

If you want to record a contra entry, then you should record a payment against the sales and the purchase invoices. 

In the event of no money, the exchange happened on the contra entry, then the current account should not reflect the same. 

Therefore, it is a good practice to have an individual bank account used to offset the two invoices. 

Following are the steps to create a contra entry bank account.

  • Visit the Banking page and click on the New button
  • Then select Bank Account
  • Click on Current under the Account type list
  • You must then enter the Account name and click on the Save button
  • Click on the Contra entries bank account
  • You must now check the nominal code of the Ledger Account to verify if it is correct
  • Click on the Save button

Now to record a payment against the sales invoice using a contra entry bank account, follow the given guidelines.

  • You should go to the Sales section and select Sales Invoices
  • Click on the invoice you want
  • Then select Record Payment
  • Add all the applicable information (the amount received, the amount paid to the bank account, the date on which the amount is received, etc).
  • And click on the Save button.

To record a payment against the purchase invoice, use the following steps.

  • Access the purchases section and select the Purchase Invoices
  • Select the accurate invoice
  • Then click on the Record payment button and enter all the information required
  • Finally, click on the Save button

How many types of Contra transactions are there?

There are four different types of contra account: contra asset, contra liability, contra equity, and contra revenue. 

  1. Contra asset account will include the details of the allowance for a doubtful account and even the accumulated depreciation. These asset accounts are recorded with a credit balance that will decrease the balance of an asset.
  1. A Contra liability account will hold the debit balance and one of the examples of contra liabilities is a discount on notes or bonds that are payable. When you compare contra asset and contra liability, contra liability accounts are not very popular as contra asset account. The liability recorded as a debit balance is mainly used to decrease the liability balance.
  1. A Contra equity account is the equity account of stockholders which has a negative balance, which means the account has a net debit balance. Contra equity account will reduce the total amount of equity that a business holds. An example of contra equity is the treasury stock which will signify the amount paid to buy back the stock.
  1. A Contra revenue account will reduce the gross revenue that results in net revenue. There are sales discounts and sales returns for contra revenue accounts and these contra revenue accounts will have a debit balance.  

Contra Entry format 

Below is the double cash book format in which you can see how the transactions are recorded. 

(Dr)           (Cr)
09.08[Cash withdrawn from bank]
To Bank
       C      2,500      -09.08      By Cash       C       2,500
21.08[Paid into bank]
To Cash
     C    -    12,00021.08    By Bank     C    12,000 

FAQs- Contra Entry 

  1. When do we have contra entry?

We have a contra entry when both cash and bank account are affected at the same time in any one transaction in the business. Such transactions that are related to contra entry are as follows:

  • When cash is withdrawn from the bank
  • When cash is deposited in the bank account

In the first scenario, where cash is withdrawn from the bank the entry will be:

Cash a/c dr

To bank a/c

Whereas in the second example, when cash is deposited in the bank the entry will be:

Bank a/c dr

To Cash a/c

  1. When does contra entry come in a double column cash book?

The contra entry will come in a double-column cash book when the cash is either withdrawn or deposited into the bank.

  1. What is contra entry in the banking system?

A contra entry is a record in the banking system when the debit and credit affect the same parent account.

  1. What is the purpose of a contra entry?

The main purpose of a contra entry is to specify the transactions that affect both bank and cash balances. This type of entry will not affect the financial position of a business.

Categories: Bookkeeping