What is Contra Journal Entry - Definition - Meaning - Example
In a Contra Entry there are two possible cases:
1. When Two Different Nature / Types of Accounts Offset Each Other
In that case, it is the estimated reversal of an Account to offset or cancel its effect. For Example when Accounts Receivable is created, then the question of Uncollectible accounts arises that how much amounts due will be recovered from our customers, so Allowance for Doubtful Accounts that is a Contra Asset Account is created that is applied either on Net Sales (Income Statement-Approach) or Closing Balance of Accounts Receivable (Balance Sheet-Approach) in order to measure the correct estimate of Net Realizable value of Accounts Receivable on Balance Sheet. The Contra Entry is as follows:
Uncollectible Accounts Expense a/c XXX
Allowance For Doubtful Accounts a/c XXX
(Allowance / Provision For Doubtful Accounts Is Created On AR)
2. When Two Similar Nature of Accounts Offset Each Other
In that case, Debit and Credit Sides includes the same types of nature of accounts but in two different positions or opposite side. Example is Cash deposited into Bank or withdrawn from Bank. Here Cash is a Current Asset and Bank is also a Current Asset which is either in hand i.e., in the company cashier custody (Cash In Hand) or in bank’s account of company (Cash at Bank).
When Cash is deposited into Bank Account of company, we pass the following contra entry in the Cash Book of company as shown below:
Bank a/c XXX
Cash a/c XXX
(Cash Deposited into Bank Account)
If Cash is withdrawn from bank account, then
Cash a/c XXX
Bank a/c XXX
(Cash Withdrawn from Bank Account)
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