What Is a Contra Entry in Accounting with Examples?
Understand contra entries in accounting: internal transfers between cash and bank accounts that simplify bookkeeping without altering overall financial standing.
A contra entry in accounting refers to a specific type of transaction that involves the internal transfer of funds within a business. This means money moves between a company’s own cash accounts and bank accounts, or even between different bank accounts held by the same entity. The purpose of a contra entry is to simplify record-keeping by clearly showing this internal movement without affecting the business’s overall financial position or external accounts.
Understanding Contra Entries
Contra entries are characterized by their dual nature, affecting two accounts within the same ledger but on opposite sides. Specifically, these transactions involve a debit to one account and a corresponding credit to another account for the same amount. These entries occur within the cash and bank columns of a cash book, reflecting an internal shift of funds. No third account is impacted by these transactions, meaning the total assets or liabilities of the business remain unchanged. The entries only reclassify where the funds are held, such as moving money from physical cash to a bank deposit.
For example, if cash is deposited into a bank account, the cash on hand decreases while the bank balance increases. This internal adjustment is recorded to ensure financial records accurately reflect the composition of a business’s liquid assets. The term “contra” itself, derived from Latin, signifies this opposing or offsetting characteristic of the entries.
Common Scenarios for Contra Entries
Businesses frequently use contra entries. One common scenario is when a business deposits cash into its bank account. For instance, if a retail store collects $500 in cash sales and deposits it into its checking account, this constitutes a contra entry. The cash account decreases, while the bank account balance increases by the same $500.
Another situation arises when cash is withdrawn from the bank for office use. Suppose a company withdraws $200 from its bank account to replenish its petty cash fund for minor expenditures like postage or office supplies. In this instance, the bank account decreases by $200, and the petty cash increases by $200.
Transfers between different bank accounts within the same organization also qualify as contra entries. If a company moves $10,000 from its primary operating checking account to a separate savings account, both accounts are affected. The checking account balance decreases, and the savings account balance increases by $10,000.
Recording Contra Entries
Recording contra entries involves a double-column cash book with separate columns for cash and bank transactions. When a contra entry occurs, both the debit and credit aspects are recorded within this single cash book. For example, if cash is deposited into the bank, the bank column on the debit side is updated, and the cash column on the credit side is updated.
To clearly identify these internal transfers, a specific notation is used in the Ledger Folio (LF) column for both the debit and credit entries. This notation is usually the letter ‘C’, which stands for “contra.” The ‘C’ indicates that the corresponding part of the transaction is found within the cash book itself, signifying that no immediate separate posting to the general ledger is necessary for these specific cash and bank accounts. This practice helps to streamline bookkeeping and provides a quick visual cue for accountants.