Contra Entries – SS1 Book Keeping Lesson Note (Second Term)

A contra entry is a cash book transaction in which both the debit and the credit entries appear in the same book, on opposite sides. It happens when surplus cash is paid into the bank, or when money is withdrawn from the bank for office use. The letter “c” is written in the folio column to show this.

Behavioural objectives

1. Explain what a contra entry is.
2. Record the debit and credit entries for cash paid into the bank and cash withdrawn from the bank.
3. State the meaning of the letter “c” in the folio column of the cash book.
4. Explain why the cash account cannot have a credit balance.
5. Explain what a bank overdraft is and how it appears in the cash book.

What is a contra entry?

A contra entry is a transaction whose debit and credit entries are both recorded in the cash book, on opposite sides.

• Meaning of contra: the word means “against” or “opposite”, because the two entries face each other.
• Why it happens: money moves between the cash column and the bank column of the same book.
• Effect on the business: only the form of the money changes, from cash to bank or from bank to cash.
• Other accounts: no customer, supplier or expense account is involved.

When do contra entries occur?

Contra entries occur in two situations: cash is paid into the bank, or cash is withdrawn from the bank.

Surplus cash paid into the bank

• Situation: a shop owner has more cash in the till than needed and pays part of it into the bank.
• Result: cash in hand falls and the bank balance rises.

Cash withdrawn from the bank for office use

• Situation: the business needs money for small daily payments and withdraws some from the bank.
• Result: the bank balance falls and cash in hand rises.

How are contra entries recorded?

A contra entry is recorded by debiting the account that receives the money and crediting the account that gives it.

Steps for cash paid into the bank

1. Write the date and details, for example “Bank” on the credit side and “Cash” on the debit side.
2. Enter the amount in the bank column on the debit side.
3. Enter the same amount in the cash column on the credit side.
4. Write “c” in the folio column on both sides.

Steps for cash withdrawn from the bank

1. Write the date and details of the withdrawal.
2. Enter the amount in the cash column on the debit side.
3. Enter the same amount in the bank column on the credit side.
4. Write “c” in the folio column on both sides.

What does the letter “c” in the folio column mean?

The letter “c” in the folio column shows that the double entry is on the opposite side of the same cash book.

• Use: it tells the reader that no other ledger account holds the second entry.
• Where it is written: in the folio column beside both parts of the contra entry.

What is a worked example of contra entries?

The table below shows two contra entries for a trader, with amounts in naira.

• First entry: bank is debited because it receives the money, and cash is credited because it gives it.
• Second entry: cash is debited because it receives the money, and bank is credited because it gives it.
• Check: each amount appears once on each side, so the entry balances.

What balance can the cash account have?

The cash account can have only a debit balance or a nil balance, and it can never have a credit balance.

• Usual balance: the cash column is brought down as a debit balance at the start of the next month.
• Exception: the balance is nil when there is no cash left in the cash account.
• Reason: a business cannot pay out more cash than it has in hand.
• Meaning of a debit balance: it is the cash the business still holds, which is an asset.
• If a credit balance appears: there is an error in the cash book, and the entries should be checked.

What is a bank overdraft?

A bank overdraft is an arrangement in which the bank allows a business to pay out more from its bank account than it has deposited.

• Permission: the bank must agree to the overdraft.
• Cost: the bank charges interest on the amount overdrawn.
• Meaning: the amount overdrawn is money the business owes the bank.
• Classification: it is a liability, because it is a debt.

How is an overdraft shown in the cash book?

1. Add up the debit and credit sides of the bank column.
2. Find that the credit side is larger than the debit side.
3. Write the difference on the debit side as the balance carried down, so both totals are equal.
4. Bring the balance down on the credit side, to start the next period.

A credit balance on the bank column therefore means an overdraft.

What is the difference between the cash and bank balances?

The cash column can only be a debit balance, while the bank column can be a debit balance or a credit balance.

Evaluation

1. What is a contra entry?
2. Which account is debited and which is credited when surplus cash is paid into the bank?
3. Which account is debited and which is credited when cash is withdrawn from the bank for office use?
4. What does the letter “c” in the folio column show?
5. On which side is the bank balance brought down when there is an overdraft, and why is it a liability?

Assignment

1. Explain why the cash account cannot have a credit balance.
2. Describe a bank overdraft and state what the bank charges on the amount overdrawn.