Along the way, when we keep the books of account, there is a certain bookkeeping term called Contra account. Do we know what is this? In simple term, contra account is actually an opposite account to another account.
The following are some of the examples of using a contra account:
- When a customer of a company is also a supplier, he or she may be a debtor as well as a creditor of the company.Instead of physically making payment vide cheque/draft or cash, his accounts by mutual consent can be settled by setting off/contra the amount owing by him to the company and amount due by the company to him. The contra or setting off needs to be reflected in the Total or Control Account to ensure the Control accounts for both debtors and creditors balances with the sum of all the individual debtors and creditors account.
- In the case of bank, say money of $10,000 came into the bank but immediately being paid out say for petty cash account hence this is a typical contra account.
- A company say has a gross sales(credit entry) of $100,000 but has opposite account which are sales return (debit entry)-$15,000 and sales allowances(debit entry)- $25,000 these are contra accounts to get the net sales figure of $100,000-15,000-25,000=$60,000.
- We have a gross cost of fixed assets(debit) of $100,000 but there is accumulated depreciation of $55,000 (credit) here again we have a contra account involved.
- Lastly, we have a gross account receivable(debit) of $200,000 but there is another opposite account of $30,000 of provision for doubtful debt(contra account). By netting the gross versus the contra account we then get a net account receivabe of $170,000
Append below is the illustration of the accounting entry of a contra account by using example no 1:
|
Example No.1 Accounting Treatment of: Contra account/entries between a debtor Mr owing to the Company and at the same time, the company is owing Mr A |
|
Assuming Mr A is our debtor and he owed the company for $4,000 being goods supplied by the company to him. However, the company also purchase goods from Mr A where the company now owed him for $5,000 How do we effect the contra entries/account: We transfer $4,000 by debiting Mr. A’s account in the Purchase ledger and crediting Mr. A in the Sales Ledger. The transfer will then appear on the debit side of the Purchase ledger Control Account and on the credit side of the Sales Ledger Control Account. Accounting entries: Debit: Mr. A ( Purchase Ledger a/c) $4,000 Credit: Mr. A ( Sales Ledger a/c ) $4,000 ( The above is also being transferred to the respective control account) Being offset of account |
Entries (RSS)