Contra Account

EXAMPLE NO.1 OF CONTRA A/C

·         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.

[ Note that: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. ]

EXAMPLE NO.2 OF CONTRA A/C

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.

EXAMPLE NO.3 OF CONTRA A/C

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.

EXAMPLE NO.4 OF CONTRA A/C

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.

EXAMPLE NO.5 OF CONTRA A/C

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

Accounting Treatment of CONTRA Account

ILLUSTRATION USING EXAMPLE 1

Contra account/entries between a debtor Mr. A owing to the Company and at the same time, the company is owing Mr. A

Question:

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:

Solution:

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