We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R). The sales allowances account contains either an allowance for reductions in the price of a product that has minor defects, or the actual amount of the allowance attributable to specific sales. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting.
Examples of revenue contra accounts are Sales Discounts, Returns and Allowances. To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts. Since it is a contra asset account, this allowance account must have a credit balance (which is contrary to the debit balances found in asset accounts). The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable. Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000.
Contra revenue definition
Note that the contra liability account has a positive balance (a debit balance), and the liability account normally has a credit balance. Hence, the book value of the liability will be the credit balance the impact of expenses on the balance sheet of the liability account minus the debit balance of its contra liability counterpart. Of that amount, it is estimated that 1% of that amount will become bad debt at some point in the future.
The contra account definition in business accounting is an account used in the general ledger for the purpose of reducing the amount in another account related to it. A general ledger is a comprehensive list of all accounts and their connected transactions in a business. A contra account balances the numbers from two or more accounts that are compared on the balance sheet.
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. In other words, accumulated depreciation will be $10,000 each year until the car depreciates to $0 twenty years later.
Discount on notes payable and discount on bonds are examples of contra liability accounts. Contra revenue is a deduction from the gross revenue reported by a business, which results in net revenue. Contra revenue transactions are recorded in one or more contra revenue accounts, which usually have a debit balance (as opposed to the credit balance in the typical revenue account).
A Fixed Asset is a Long-term Asset used by a company to create revenue. Each year of an asset’s life, another year of Depreciation Expense is recorded. The offset to the Depreciation Expense account is Accumulated Depreciation. A contra revenue account allows a company to see the original amount sold and to also see the items that reduced the sales to the amount of net sales. Accumulated depreciation is the total of all depreciation that has been charged to existing fixed assets such as equipment and buildings. There can be hidden value in stocks that have a lot of fully depreciated buildings.
List of Contra Accounts
The purpose of the Allowance for Doubtful Accounts is to track the reduction in the value of the asset while preserving the historical value of the asset. Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens”publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa. For example, if you bought a car for $10,000 seven years ago and you estimated a seven-year life on the vehicle. Now, the car is worth less than $1,000 and you continue to put more money into upkeep, maintenance, and insurance for the car than the value of the vehicle. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting.
That’s because, as far as accounting is concerned, you haven’t really “spent” $20. You’ve just converted $20 worth of cash into $20 worth of shoes; an asset that remains in your inventory. Since you no longer have the shoes, aka the asset, you record a $20 expense on your income statement, But you also record $30 in revenue from the sale, so your net income is $10. Of course, you’ll also have to pay your employees’ wages, your rent, your utilities and other costs. Those are expenses, too, because, without them, you wouldn’t have had a store in which to sell the shoes and collect the revenue.
What is a Contra Liability?
A contra liability is an account in which activity is recorded as a debit balance is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as contra asset accounts. It is not classified as a liability since it does not represent a future obligation. A contra account is a negative account that is netted from the balance of another account on the balance sheet.
- Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts.
- These contra revenue accounts tend to have a debit balance and are used to calculate net sales.
- The amount for estimated uncollectible accounts is a bad debt operating expense.
- Again, the company’s management will see the original amount of sales, the sales discounts, and the resulting net sales.
These accounts also ensure that you follow the matching principle in accounting, which states that you record expenses in the same period you incur them. Since the entry for cash sales is recorded as a credit in a revenue account, then a return on sales will be recorded as a debit in the revenue contra account, Return on Sales or Sales Returns and Allowances. Although you may be familiar with the normal balance requirements of each classification, a contra account will have the opposite requirement. Contra asset account examples include any transaction made on a contra account to balance out the debit account.
Types of Contra Accounts for Revenues
At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset. For example, if the balance of accumulated depreciation increases from $20,000 to $50,000, this means that the depreciation expense amounts to $30,000, which will be listed in the income statement. Whenever the balance of a CA account increases (credit to the CA account), the increased amount is written off as an expense and is reported in the company’s income statement. Contra accounts act like regular accounts on the balance sheet but have a unique purpose. For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance. The Allowance for Doubtful Accounts is used to track the estimated bad debts a company my incur without impacting the balance in its related account, Accounts Receivable.
- The difference between an asset’s balance and the contra account asset balance is the book value.
- The amount is not reported, and the net sales amount is reported on the income statement.
- Accounting contra asset accounts or contra revenue accounts follow a simple double-accounting procedure to eliminate errors in financial reporting.
- Taken together, the asset account and contra asset account reveal the net amount of fixed assets still remaining.
Emilie is a Certified Accountant and Banker with Master’s in Business and 15 years of experience in finance and accounting from corporates, financial services firms – and fast growing start-ups. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. Contra accounts are confusing at first, but, with a little study, understanding them becomes second nature. Let’s go over how they work and what the main types are, and then finish with an example. QuickBooks Online has different interphase and features compared to QuickBooks Desktop.
Doubtful Debts and Contra Assets
You can also record contra revenue within the sales account, but this means that it will be buried within the total amount of revenue reported, so that management cannot easily determine the amount of contra revenue. If your company has minimal contra revenue activity, it is acceptable to record these transactions within the revenue account. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming.
Any products that are sold at a discount or returns are deducted from gross revenue to produce net revenue as the top line on the income statement. A revenues account with a debit balance instead of the usual credit balance. Examples include sales returns, sales allowances, and sales discounts.
Contra Account Examples
Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers. The amount is not reported, and the net sales amount is reported on the income statement. If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative. On the other hand, if you’re looking at a high-flying growth stock that reports new revenue growth records each quarter but has a massive allowance for doubtful accounts, there may be problems ahead.
The difference in the price, $1,500, is the amount for return on sale. Just in case you wanted to run a report from your accounts, you can click the drop-down ▼ button on the Action column and then select Run report. The main reason is to make the remaining shares more valuable, as their prices are expected to rise after the stock buyback.
Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns. The money left over after a company supports operations can be a snapshot of its financial health.
The most common contra assets are accumulated depreciation and the allowance for doubtful accounts. For example, the debit will be to the expense account in an estimated uncollectible amount from a credit sale. The credit will be to the asset account or allowance for doubtful accounts. Contra revenue accounts show the deducting adjustments to gross revenue or producing net revenue.