How to use contra accounts in ParishSOFT Accounting
The following information has not been reviewed by a certified public accountant. We are adding it here for our customer's convenience. Please check with your own accountant before applying these principals to your accounting practice.
General information on contra accounts
A "contra" account is one that is typically used to reduce the value of a related account of the same account type when the two are netted together. A contra account's balance is negative which is the opposite of the related account.
Contra accounts are typically used in for-profit accounting. The only time you would need to create an actual contra account is if you need the account to be budgeted and you want the two accounts to be adjacent to each other on the financial statement.
Here are the typical account balances for each account type. When a contra account is assigned one of these account types, the typical balance would be the opposite.
How to add and use a contra account
- Contra accounts are created the same way as normal accounts; the only difference is in how they are applied and that they are sequential to their related account. For example:
Note: never use a negative sign in the amount for a contra account.- A standard expense account would be debited in a bill/check distribution
- where a contra expense account would be credited in a deposit distribution
- A standard income account would be credited in a deposit distribution
- where a contra income account would be debited in a bill/check.
- A standard asset account is normally debited when the balance is increased and credited when the balance is decreased.
- A contra asset account is credited when the balance is increased (which translates to a larger negative) and debited when the balance is decreased (moves closer to zero)
- A standard expense account would be debited in a bill/check distribution
- Contra accounts are normally paired with their related account and set up so they will appear on financial statements right next to each other.
The following is an example of how one might use a contra-account for Tuition and Tuition discounts/scholarships:
Let's say total tuition charged: $10,000; total tuition payment received $8,000; tuition discount $2,000:
Debit cash 8,000
Credit Tuition Income 10,000
Debit Tuition (Income) discount/scholarship 2,000
How to budget for a contra-account
To budget for a contra-account, it is indeed okay to enter negative amounts. As a matter of fact, negative numbers are really expected for a contra-account.
If you have a tuition income account and the budget is 200,000 and a tuition discount/scholarship contra-account with a budget of 10,000 it would be entered into the budget as:
Tuition Income: 200,000
Tuition discount/scholarship (income): -10,000
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