You may say I know “Contra” the famous NES video game, but knows nothing about contra entry cash book. Contra Entry is a term you may find in business accounts.
Do you know, in day-to-day life, everyone encounters financial transactions that can be called contra entry?
For example, when you withdraw money from an ATM, visit the bank, deposit some money in your account, or deposit money from one bank account to another, such transactions are recorded in the books of accounts as contra entries.
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Definition of contra entry
From the introduction above you must have understood that contra entry is related to cash and bank. To be specific, a transaction in financial accounts that affects both cash and bank accounts is called a contra transaction.
Contra is a Latin word meaning “opposite”. However, business accounts refer to such transactions as “contra vouchers”.
In simpler terms, a transaction from one cash account to another cash account or from one bank account to another bank account may be known as a contra transaction. When those transactions find an appropriate place in the cash book they become contra entries.
Illustrative explanation regarding contra entry
From the above illustration, it is clear that in practice contra entry involves a financial transaction that takes place between:
1. Case account to Bank account
2. Bank account to Case account
3. Bank account to Bank account
4. Case account to Case account
You may have a question in your mind that you understand the transaction from bank account to cash account but what do you mean by a transaction from cash account to cash account?
Let’s explain it with an example. In business, many financial transactions take place every day. Among these, some transactions are of very small amounts. Like the purchase of stationery, courier charges, cost of refreshments etc.
A separate account is maintained for such petty transactions and it is called a Petty-cash account. When financial transactions for such miscellaneous items take place, they are recorded in the Petty-Cash account. Where does the money in the Petty-case account come from?
Each business unit has its case account. In which business allocates some money periodically. When money is transferred from the case account to the Petty-Case account, the transaction is called a contra transaction.
Also Read: Motives Of Holding Cash
5 Examples of contra entries
Remember: Contra entry affects both cash account and bank account.
|Sr. No.||Particular||Contra Entry?||Explanation|
|1||Cash transfer of Rs.1000 to Petty-Cash account||Yes||Cash account and Petty-Cash account both affected. (Cash + Cash)|
|2.||Mr. Thomas is paid Rs.5000 by cheque||No||Affects only cash account.|
|3.||Cash of Rs. 10,000 withdrawn from bank||Yes||Cash account and Bank account both affected. (Cash + Bank)|
|4.||Stationary purchased of Rs.500||No||It affects only cash account.|
|5.||Salary paid to employee not||No||It affects only cash account.|
Contra Entry Format
In the above table, we see the contra entries. In the table, Dr. stands for Debit side and Cr. stands for Credit side. LF stand for Ledge Folio and “c” stand for contra.
Pros and Cons of contra Entry cash book
A contra entry cash book is a type of cash book used to record transactions involving cash exchange between two parties. The contra entry cash book is divided into two sections, one for each party involved in the transaction.
The advantage of using a contra entry cash book is that it provides a clear record of the transactions that have taken place between two parties.
The disadvantage of using a contra entry cash book is that it can be difficult to keep track of the two parties involved in the transaction, and it can be easy to lose track of the cash that is being exchanged.
Importance of the contra entry cash book in small and medium businesses
The contra entry cash book is a vital tool for small and medium businesses. Following are some important points of keeping the contra entry cash book.
1. It helps businesses keep track of their income and expenses
2. It provides a clear picture of the financial situation.
3. This information is essential for making sound financial decisions
4. It ensures the financial health of the business.
5. The Contra Entry Cash Book can also be used to reconcile bank accounts, and prepare financial statements.