Before proceeding into the topic of What is Contra Entry in Accounting, lets understand some foundation topics. Contra Entry is a journal entry that records cash and/or bank account transactions. The accounting treatment of this entry does not change the balance at the financial statement line item. So, there will not be any change in the higher-level account balance.
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Examples of Contra entry
How about an example to understand this better?
Mr Hero has two bank accounts and must maintain a minimum balance at the end of each month. So, Mr Hero ensures this policy is met by checking his accounts and transferring the balance from one bank to other.
Does there any change in the bank balance of Mr Hero as a whole?
It’s obvious.
There isn’t any change in the balance, and it’s as simple as moving money from one wallet to another of the same individual.
Runners Insight
Contra is derived from Latin and means Opposite or Opposing or Against.
What transactions fall into this category of Contra Entry?
There are four types of transactions falling into this category.
– Transfer from a Bank Account to another Bank Account
– Deposit of Cash into Bank Account
– Withdraw Cash from Bank Account
– Transfer from Cash Account to Cash Account
Deposit/Withdraw of Cash into/from Bank Account:
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.
Therefore, the transfers between Cash and bank shall belong to the same person/entity so that we can call this entry as a contra.
Runners Insight
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.
Transfer from Cash Account to Cash Account
Are you wondering why there is a movement from one Cash Account to Another?
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. However, these became obsolete with the latest advancement in digital money. So, the concept of Petty Cash is not much in operational. We have all the QR Code scanners available to pay for these expenses, and no need to maintain physical Cash.
Contra Entry Examples:
We now understand the Concept. Let’s see a couple of transactions and determine if those fall into this Category.
1. Raju transfers money from his ABC Bank account to another Account with CBA Bank
The transaction involves the transfer from one bank account to another relating account. So, the entry is a Contra.
2. Kamesh received Cheque for the sales made.
The above transaction involves only Bank (Cheque) and Sales GL. So. there is no contra entry.
3. Failed Company withdraw Cash from their Account maintained with Successful Bank.
The transaction involves Cash and Bank Accounts. 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.
Also Read: Distribution Journal Entry
FAQ’s
What are the types of contra entry?
There are four types of contra entry. These are – Bank Account to Bank Account, Bank Account To Cash Account, Cash Account to Bank Account and Cash Account to Cash Account.
The Concept of Contra Entry is different from Contra Account. Contra Account is the opposite GL account that reduces the linked Account balance when two GLs are netted together. For example, Accumulated depreciation is the contra account for the fixed asset. The balances for these Contra Accounts are quite the opposite. For example, the Fixed asset has a debit balance, and accumulated depreciation has a credit balance.
There are 4 Contra Accounts, namely Contra Asset, Contra Liability, Contra Revenue and Contra Equity. Refer to this article for further details.
What is the purpose of contra entry?
The net effect of this entry is nil. 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. But the accounting records shall not be falsified.
Is Cheque deposit contra entry?
The answer will depend on the scenario. 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.
For example, assuming an entity receives a Cheque from a debtor and is deposited into the bank account, it’s not a contra entry. There is the involvement of only one bank account.
Is cash withdrawal a contra entry?
Yes, Cash withdrawal is a Contra entry, and the Cash withdrawn from the same entity bank account results in nil effect on the parent account.
Conclusion:
Contra Entry Meaning is Opposite Entry. The effect of recording a financial transaction involving the Cash and/or Bank accounts is nil, and there is no change in the balance at Cash and Bank accounts, and there will not be any increase or decrease in Parent GL.
