Contra Expense Account

A contra expense account is a type of contra account that is paired with an expense or cost account but carries a credit balance, reducing the related expense to its net amount. The best-known examples are found under a periodic inventory system, where Purchase Returns and Allowances and purchase discount accounts reduce the Purchases account. If a retailer records purchases of $200,000, returns goods costing $5,000 and takes $3,000 of early payment discounts, its net purchases are $192,000. Other examples include employee reimbursements of benefit costs credited against Health Insurance Expense, or rebates credited against an expense. Keeping these credits in a separate account shows managers both the gross cost and how much was recovered. Also see Contra Account and Purchase Discount.