”Contra” Transactions: When Income is not Income, and Expenditure not Expenditure.
It happens to all of us: sometimes members or clients accidentally get overcharged, or part of a grant has to be refunded, or we paid too much to someone else and get a refund. The accounting treatment of this trips many people up.
Let’s say you run an after-school care service and a parent has set up an automatic payment to cover the fees for the child each week. At the end of the term the parent forgets to cancel the AP and accidentally pays for another two weeks. Of course, you have to refund this money. But what kind of expense is this?
The parent paid for something they never should have paid for, so those payments should not appear as ‘income’ in your reports. Many people create a special ‘refunds’ account in expenditure for these situations, but a refund is not expenditure, and there should be no such account. Refunds should always be coded against the account of the original transaction. If there is an income account ‘Parent Fees’ where the overpayment has been recorded, then the refund must also be recorded in this account. These kinds of transactions are often called ‘contra’ transactions.
Another situation is the refunding of a portion of a grant. If you have received, say, $3,000 from a grantmaker and found you could not spend $500 of it, which you refund, then you have effectively received a $2,500 grant. This is often erroneously recorded as $3,000 grant income and an expenditure item of $500 called ‘refunded grant’ or similar.
Without such ‘contra’ entries some organisations’ accounts would become wildly inaccurate as their figures include payments and receipts that were simply made in error as income or expenditure. An organisation may show a higher income from parent fees only because of more erroneous payments in that year, not because they have actually received more – and that would make this figure meaningless.