[Q.8] What is a contra expense account?

A contra expense account is a general ledger expense account that is expected to have a credit balance instead of the usual debit balance. In other words, the account’s credit balance is contrary to (or opposite of) the usual debit balance for an expense account.

Another description of a contra expense account is an account that reduces or offsets the amounts reported in one or more of the other general ledger expense accounts.

One use of a contra expense account is to record the amounts of expenses that were reimbursed by its employees. For example, Company M might debit its expense account 4210 Employee Health Insurance Expense when recording the insurance company invoice of $10,000. If Company M required its employees to reimburse it for $2,000, Company M could credit its contra expense account 4211Portion of 4210 Reimb by Employees. The benefit of using the contra expense account is that the company’s managers can look in account 4210 to immediately see the company’s total cost of the health insurance. They can also easily see in account 4211 the amount that the employees paid. The income statement could simply report the net amount of the expense, which is $8,000 ($10,000 minus $2,000).

Posted in: accounting,Q.1-10