Contra accounts are special accounts that are established to decrease the balance in another account indirectly. They preserve the identity of the primary account and provide an account to debit or credit when one does not exist. A contra expense account is a type of such contra accounts.
A contra expense account is defined as an account set up in the accounting books that is associated with another specific expense account and is used to offset it. A normal balance for this type of account will be credit. In simple words, to increase a contra account, we will use a credit balance, which is contrary to (or the opposite of) the usual balance for an expense account. The value of another expense account paired with the contra expense account is thus being decreased.
There are several contra expense accounts that many businesses widely use in their bookkeeping. You will usually see the following contra accounts:
- Purchase returns
- Purchase discounts
- Purchase allowances.
For example, a company sells home appliances. A buyer purchase a microwave for $199.99. However, he decides to return the product and purchase a microwave with more functions.
To record this purchase return, a company can just reverse the previous entries that reflected the initial purchase. However, this would not reflect the financial activities at the company correctly. Moreover, the management will not be able to analyze what percentage of their products are returned, which products are returned more frequently, etc. Thus, a contra expense account is used. In our case, it will be a Purchase Returns contra expense account.
The company’s bookkeeper will record this purchase return as follows:
|Less: Purchase Return||$199.99|