Contra Entry
Contra Entry is the transaction that impacts both debit and credit of cash & cash equivalent. It is the transaction between cash, petty cash, bank, and other accounts under cash. The company may need to transfer cash from the bank to petty cash. So accountant needs to prepare contra entry.
The company may have multiple bank account so they will set up multiple chart account for each bank. The transfer of cash from one account to another is also considered as a contra entry.
Contra Entries relate to the following account:
- Petty Cash
- Cash on Hand
- Cash at bank
Contra Entry Example
Please check the contra entry example below:
- Transfer cash at the bank to the petty cash balance. Company needs to maintain petty cash balance for small expenses in the office. At the end of the month, the petty cash balance needs to refill and ready for next month’s expenses. The company should debit petty cash balance and credit cash at bank.
| Account | Debit | Credit |
|---|---|---|
| Petty Cash | 000 | |
| Cash at Bank | 000 |
- Cash deposit to the bank. Company makes the sale and collects cash from the customers so at the end of the day/week accountant needs to deposit the cash to the bank. The journal entry is debit cash at bank and credit cash on hand.
| Account | Debit | Credit |
|---|---|---|
| Cash at Bank | 000 | |
| Cash on Hand | 000 |
- Transfer cash from one bank account to another. Company with multiple bank accounts may need to transfer from one bank to another bank for some reasons. This transaction only impacts the bank balance.
| Account | Debit | Credit |
|---|---|---|
| Cash at Bank A | 000 | |
| Cash at Bank B | 000 |
Another type of Contra Entry
Contra entry also refers to the offset between accounts receivable and accounts payable of two separate company. It happens when the company has accounts receivable and accounts payable with another company. So both companies decide to net off the balance and keep the remaining.
This contra entry involves only accounts receivable and accounts payable. And it requires to record for both companies to ensure the remaining balance is reconciled between the two parties.
Example
Company A has accounts receivable of $ 5,000 with Company B. One week later, company A purchase goods from company B for $2,000 on credit, so it means that Company A has accounts payable with Company B $ 2,000. So company wants to net off the A/R and A/P with company B.
The contra entry would be:
| Account | Debit | Credit |
|---|---|---|
| Accounts Payable | 2,000 | |
| Accounts Receivable | 2,000 |
So after the contra entry, the balance of accounts receivable will remain only $ 3,000 and there are no accounts payable.