Contra expense definition
/What is a Contra Expense?
A contra expense is an account in the general ledger that is paired with and offsets a specific expense account. The account is typically used when a company initially pays for an expense item, and is then reimbursed by a third party for some or all of this initial outlay. For example, a company pays for medical insurance on behalf of its employees, which it records in an employee benefits expense account. Then, when the employee-paid portion of the expense is paid to the company by employees, these reimbursements are recorded in a benefits contra expense account. The net effect of the two accounts is a reduced total benefits expense for the company.
Contra expense accounts have a natural credit balance, as opposed to the natural debit balance of a typical expense account. Therefore, a contra expense account that contains a debit balance must have a negative ending balance.
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Types of Contra Expense Accounts
The main types of contra expense accounts are noted below:
Purchase discounts. This account tracks discounts received from suppliers for early payment on purchases. It reduces the total cost of goods purchased, thus lowering overall expenses recorded in the purchases or cost of goods sold accounts.
Purchase returns and allowances. This account records the value of inventory returned to suppliers or reductions in price due to damaged or defective goods. It offsets the purchases account, thereby reducing total purchasing expenses.
Reimbursements from employees. This account captures amounts repaid by employees for expenses initially covered by the company, such as personal charges made on corporate cards. It offsets the original expense account to reflect only the company’s true expense.
Vendor rebates. This account records rebates or refunds received from suppliers after purchases are made, often based on volume thresholds or promotions. It reduces total expenses associated with those purchases when the rebate is received.
Each of these accounts serves to decrease the related expense account, providing a more accurate picture of net expenses.
When to Use a Contra Expense Account
Contra expense accounts are rarely used, because organizations find it to be easier to record third-party payments directly against an expense account. However, these accounts are still useful when dealing with large quantities of reimbursements, where it is cleaner and less confusing to store the information in a separate account. Thus, the use of a separate contra expense account makes it easier to monitor the flow of expenses and reimbursements.
Examining a trend line of the monthly additions to a contra expense account is a good way to determine whether any third party payments were not made to the company, or if two of these payments were incorrectly recorded within the same month. Thus, the account can be used for investigative purposes.
Presentation of Contra Expenses
Expense accounts and the contra expense accounts with which they are paired are typically combined in the income statement in a single line item, so that readers are not aware that a contra account even exists.
Example of a Contra Expense Account
Inscrutable Corporation offers long-term disability insurance to its employees under an arrangement in which it pays for the insurance, and then participating employees reimburse it for half of this cost. In the first month of the arrangement, the company pays the insurer $10,000, which Inscrutable records in a long-term disability insurance expense account. It then records $5,000 of contra expense against this account, which is derived from deductions taken from employee pay. The net cost to the company is $5,000 per month.