Contra means against. In double entry bookkeeping terms, a contra expense account refers to an account which is offset against an expense account.
When the two balances are offset against each other they show the net balance of both accounts.
Contra expense accounts are useful when a business needs to keep the two accounts separate so as not to lose information in its detailed bookkeeping records, but for presentation reasons in the financial statements, it is necessary to offset them against each other and show a net balance.
Contra Expense Account Examples
The following are examples of contra expense accounts used in double entry bookkeeping.
- Purchase returns account
- Purchases allowances account
- Purchase discounts account
Purchase Return, Allowance, and Discount Contra Expense Accounts
Purchase returns, allowances and discounts are all examples of contra expense accounts. The accounts normally have a credit balance and in use are offset against the purchases account which is normally a debit balance. The net balance of the accounts shows the net value of the purchases made by the business for the accounting period.
Using the contra expenses accounts, allows information about the original purchases to be maintained on the purchases account, and details of the purchase returns, purchases allowances and discounts received to be maintained on the respective contra expenses account.
In the trial balance the accounts would appear as follows.
|Purchase returns (Contra)||500|
|Purchase allowances (Contra)||200|
|Purchase discounts (Contra)||250|
In the financial statements the purchases account would be offset against the contra expense accounts to show the net purchases.
|Purchase returns (Contra)||-500|
|Purchase allowances (Contra)||-200|
|Purchase discounts (Contra)||-250|
Contra expenses accounts are commonly encountered, however, a business can also have other forms of contra accounts including:
- Contra asset account – for example, depreciation, allowance for doubtful debts.
- Contra equity account – for example, owner’s drawings account, treasury stock account
- Contra liability account – for example, discount on bonds payable account
- Contra revenue account – for example, sales returns account
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.