Per contra is a term used in accounting and finance to refer to entries that offset each other on financial statements. The term is Latin for “by the opposite side” or “on the other side,” indicating that an entry on one side of the ledger has a corresponding entry on the opposite side. This concept is crucial in double-entry bookkeeping, where every financial transaction affects at least two accounts.
What Does “Per Contra” Mean?
In simple terms, per contra entries are those that negate or balance each other out. If an entry is made on the debit side of one account, there is a corresponding entry on the credit side of another account. This ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced.
Importance of Per Contra Entries
- Accuracy: Ensures the accuracy of financial records by maintaining the balance in the accounting equation.
- Transparency: Provides clear visibility of the financial transactions and their effects on different accounts.
- Error Detection: Helps in identifying and correcting errors, as discrepancies in the ledger are more easily spotted when entries are balanced.
- Compliance: Adheres to the principles of double-entry bookkeeping, which is a standard practice in accounting.
How Per Contra Works
Per contra entries can be seen in various financial activities such as adjusting entries, internal transfers, or error corrections. Here’s how it typically works:
- Transaction Occurs: A financial transaction takes place, affecting multiple accounts.
- Debit and Credit Entries: The transaction is recorded with a debit entry in one account and a corresponding credit entry in another.
- Balance Maintained: The ledger remains balanced as the debit and credit entries offset each other.
Example of Per Contra in Practice
Let’s consider a simple example involving the purchase of office supplies on credit:
- Office Supplies Purchase: A company buys office supplies worth $500 on credit.
- Debit Entry: The “Office Supplies” account is debited by $500, reflecting an increase in assets.
- Credit Entry: The “Accounts Payable” account is credited by $500, reflecting an increase in liabilities.
In this example, the per contra entries are:
- Debit: Office Supplies $500
- Credit: Accounts Payable $500
Both entries balance each other, maintaining the integrity of the accounting records.
Types of Per Contra Accounts
- Contra Asset Accounts: Accounts that offset asset accounts, such as “Accumulated Depreciation” which offsets “Property, Plant, and Equipment.”
- Contra Liability Accounts: Accounts that offset liability accounts, such as “Discount on Bonds Payable.”
- Contra Equity Accounts: Accounts that offset equity accounts, such as “Treasury Stock.”
Importance in Financial Statements
Per contra entries are critical in financial statements as they provide a more accurate picture of a company’s financial health. They ensure that:
- Assets are not overstated: By accounting for depreciation and amortization.
- Liabilities are accurately presented: By including discounts and premiums on bonds payable.
- Equity is correctly calculated: By including treasury stock and other adjustments.
Real-World Example
A company has a building that originally cost $100,000. Over time, the building depreciates, and the accumulated depreciation is recorded as $20,000. The per contra entries would be:
- Debit: Depreciation Expense $20,000
- Credit: Accumulated Depreciation $20,000
In this case, the accumulated depreciation is a contra asset account that reduces the value of the building on the balance sheet, showing a net book value of $80,000 ($100,000 – $20,000).
Conclusion
Per contra is a fundamental concept in accounting that ensures the balance and accuracy of financial records through double-entry bookkeeping. It involves making offsetting entries that balance each other out, maintaining the integrity of the accounting equation. For learners in finance and accounting, understanding per contra entries is essential for accurately recording and interpreting financial transactions. Whether dealing with asset depreciation, liability adjustments, or equity corrections, mastering per contra entries helps in maintaining clear, accurate, and compliant financial records.