What is Contra Entry: Meaning, Examples, Format, Advantages

Every day, financial transactions have become so common and automated that nobody cares about the financing mechanics that make them happen. A contra account is needed whenever a transaction involves a physical or digital money transfer, resulting in bank and cash account changes. Contra entry matches credit and debit transactions to maintain balanced ledger accounts. 

What is Contra Entry in Accounting?

Contra entry denotes the shifting of funds between connected accounts. When a beneficiary account is credited, the sender account must be debited accordingly. Contra-entry transactions happen between comparable accounts or using cash related to bank accounts. These transactions are contra in nature, and hence the name. Contra entry is often called a contra voucher. 

Types of Contra Entry

When there is a contra entry, it means that resources are circulated internally between records that are financially aligned with each other. Contra entry is made in cases of the following transactions:

• Cash account to bank account
• Cash account to cash account 
• Bank account to cash account
• Ban account to bank account

Businesses usually maintain a bank account and petty cash account. The petty cash account is used for minor expenses like stationery, refreshments, courier charges, etc. Funds for petty cash accounts are usually transferred from the main bank account. 

What is the purpose of contra entry?

Multiple chart accounts are essential for businesses with more than one bank account. Contra entry is needed when you transfer cash from one account to another. It becomes necessary for the following accounts:

• Petty cash account
• Cash on hand
• Cash at bank

Contra entry always offsets transactions between two separate company accounts for accounts payable and accounts receivables. It may also involve transactions between two companies to reconcile bank accounts. 

Contra entry is associated with deposits and withdrawals to and from bank accounts. When there is a contra entry, it means that the transaction affects both cash and bank balances. 

The important point to note here is that contra-entry doesn't affect the business's financial position. It is only used to offset entries on either side of accounts. 

Contra Entry Journal Entry

A cash book is used for contra entries. This book contains cash and bank columns so that transactions involving both accounts are entered into the same book. This is also called a contra book. It is a double cash book.

On both sides of the cash book, the L.F. column will contain the letter C, denoting contra entries. 

Contra Entry Examples

Knowing the meaning of contra entry is vital to ensure accurate bookkeeping. Only contra entries must be entered into the contra book. Some examples that help in understanding contra entries are explained here:

How to Enter Contra Entry?

As contra entries affect both cash and bank accounts, you must enter the details accurately. Debit transactions are written on the debit side (Dr) and will have a To entry. Destination accounts will have a corresponding entry on the credit side (Cr) and will have a By entry. You must enter two entries corresponding to both affected accounts in the same entry book. 

In the double entry method, all transactions are recorded twice side by side to offset the transactions and clear any confusion.  

Following is the format for contra entries:

Advantages and Disadvantages of Contra Entries

Some of the advantages of contra entries are:

• Streamlined recording of all offsetting transactions in a single book 
• Accurate financial reporting of all related transactions 
• Simplified reconciliation with consolidated transactions 
• Clear representation of financial transactions that involve both cash and bank accounts

It also has a few disadvantages:

• Increased complexity involving double entries for each transaction 
• Misstatements if the bookkeeper doesn't correctly understand what contra entry is
• Limited applicability as it can be used only for specific transactions 

Conclusion 

Contra entries make it possible to track financial records involving cash and bank accounts. It is crucial for accurate bookkeeping and accounting. As contra entries involve two related accounts, they are recorded on opposite sides of the cash book. The double entries help with reconciliation and simplification. However, maintaining contra entries is time-consuming, and misinterpretation can result in inaccuracies.