Contra Entry
What is a contra entry?
A contra entry is a journal entry that affects two accounts on the same side of the accounting equation. It does not change the overall totals of assets, liabilities, or equity.
Contra entries typically involve movement between two of the business's own cash-or-bank accounts, such as depositing cash into the bank or withdrawing cash from the bank. Under Indian accounting practice, contra entries are marked with the letter "C" in the folio column of the cash book. This indicates that both the debit and credit occur within the cash book itself.
Why is a contra entry important?
Contra entries maintain accuracy when funds move between a business's own cash and bank accounts. Without the contra treatment, these internal transfers could be double-counted as receipts or payments, distorting income and cash flow.
Contra entries also simplify bookkeeping and reconciliation. By clearly identifying transfers within the business's own accounts, they help accountants prepare accurate bank reconciliations, cash flow statements, and audit trails, and reduce the risk of misclassification.
How does a contra entry work?
1. Identifying the internal transfer
The accountant identifies a transaction that involves only the business's own cash and bank accounts, such as depositing cash into the bank or withdrawing cash from the bank for office use.
2. Recording the contra voucher
The transaction is entered in a contra voucher rather than a receipt or payment voucher to indicate that no external party is involved.
3. Posting equal debits and credits
The voucher debits one internal account (for example, Bank) and credits another (for example, Cash) by the same amount, keeping the totals balanced.
4. Marking the entry in the cash book
If the business maintains a manual cash book, the entry is marked with the letter "C" in the folio column to identify it as a contra entry.
5. Excluding from external transactions
At period-end, contra entries are excluded from calculations of receipts, payments, and turnover, since they represent internal movement of funds rather than income or expense.
Example
A retail store in Coimbatore deposits ₹80,000 from its daily cash collections into the current account at its bank. The accountant records this as a contra entry: a debit to the Bank account and a credit to the Cash account, both for ₹80,000.
Later in the week, the store owner withdraws ₹15,000 from the bank to meet daily operational cash needs. This is also recorded as a contra entry: a debit to the Cash account and a credit to the Bank account.
At month-end, both transactions appear in the cash book marked with "C" and are excluded from the calculation of sales, receipts, and payments for the period. They only reflect movement of the business's own funds between its cash and bank balances.
Key points to remember
- A contra entry is a journal entry that affects two internal accounts, typically Cash and Bank, without changing the business's total assets or liabilities.
- It is recorded in a specific type of voucher called a contra voucher.
- Common examples include depositing cash into the bank, withdrawing cash from the bank, and transferring funds between two bank accounts.
- Contra entries are marked with the letter "C" in the cash book folio column under Indian accounting practice.
- Contra entries are excluded from calculations of external receipts, payments, and turnover.
- Accurate recording of contra entries prevents double-counting and supports clean bank reconciliation.
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Every contra entry is a type of journal entry, but not every journal entry is a contra entry. A journal entry can involve any two accounts, external or internal. A contra entry specifically involves two of the business's own cash-or-bank accounts, with no external party involved.
A contra voucher in TallyPrime is a dedicated voucher type used to record contra entries. It restricts entry to Cash and Bank accounts, ensuring that only internal transfers between these accounts are captured under this voucher.
No. Contra entries represent internal movement of funds rather than sales, purchases, or income. They are excluded from turnover, receipts, and payments for reporting and tax purposes.
Yes. A transfer of funds between two of the business's own bank accounts is also treated as a contra entry, with a debit to the receiving bank account and a credit to the paying bank account.
Contra entries have an equal debit and credit and, therefore, do not disturb the arithmetic accuracy of the trial balance. They also do not change the total balances of assets, liabilities, or equity.
