Contra Accounts Examples & How They Work

The company estimates that it will not be able to collect 1,000 from its customers. The allowance for doubtful accounts is a contra asset account that is used to offset Accounts Receivable on the balance sheet. Below is the asset account debit balance and accumulated depreciation account credit balance on the balance sheet. Including https://www.bookstime.com/ accounts is important in the income statement because it shows the original amount of sales the firm has made, along with any factor that has reduced that amount. The contra equity account treasury stock is reported right on the balance sheet. Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period.

For example, a bond with a principal amount of $1,000 may be sold for only $950. The bond is listed on the balance sheet at the full amount of $1,000, but the cash received is just $950, so a contra liability for the discount is listed to make the entry balance. A contra revenue account plays a crucial role in accounting, providing valuable insight and transparency into financial records. In this article, I will explore the definition of a contra revenue account and provide real-world examples to help you better understand its significance. For example, if your business has accounts receivable of $50,000 and an allowance for doubtful debts account totalling $5,000, the net accounts receivable is $45,000.

Contra Assets Account Example

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. An estimate of bad debts is made to ensure the balance in the Accounts Receivable account represents the real value of the account. Allowance for Doubtful Accounts pairs with the Bad Debts Expense account when doing adjusting journal entries. All in all, contra accounts are an important tool for businesses to use to understand their financial standing better.

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. Recording a contra account involves offsetting the value of one account by using another account. When it comes to contra asset accounts, the offset is made to an expense account, like bad debt expense. This allows companies to estimate a reasonable amount to book into the contra account using the allowance method of accounting or the percentage of sales method.

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The allowance method involves estimating the amount that is likely to be uncollectible and booking it into the contra account. On the other hand, the percentage of sales method assumes a fixed percentage of goods or services sold that the company will not be able to collect payment for. At Zeni, we keep it simple for you to record all of your contra revenue in one dedicated place and view the changes to your accounts over time AND in real-time. Our AI-powered tool gives you daily access to your company’s finances while our expert finance team double-checks the numbers every step of the way. Contra revenue is the difference between gross revenue and net revenue. The business records the agreed offset with a contra entry journal as follows.

Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Accumulated depreciation reflects the reduction in value of a fixed asset. A contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability.

What Are the Different Types of Contra Accounts?

Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. If Company A offers a two percent discount on the total amount if paid within a week instead of the usual 30 days, the company records the discounted amount in its contra account as Sales Discounts. The company would see the original amount, discounted sale, and net sales in the contra revenue account. A contra revenue account is a revenue account that is expected to have a debit balance (instead of the usual credit balance). In other words, its expected balance is contrary to—or opposite of—the usual credit balance in a revenue account. In double entry bookkeeping terms, a contra revenue account or contra sales account refers to an account which is offset against a revenue account.

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. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. Each type of contra account has its specific purpose in financial reporting, helping to present a more accurate and detailed picture of a company’s financial position. It is important to realize that unearned revenue is not a contra revenues account.

Contra revenue accounts

Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. A contra account is used in a general ledger to reduce the value of a related contra revenue account when the two are netted together. It’s normal for businesses to receive refund requests or returns from customers. A delivery van is purchased by a business to use in delivering product and picking up materials.

However, some asset accounts need a negative counterpart to reduce the balance of that account. The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. Revenue is an income statement account, but it flows through to the equity section of retained earnings as well. 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. For example, sales returns and allowances are recorded as a debit to the account and a corresponding credit to accounts receivable.

Contra Equity Accounts

A debit will be made to the bad debt expense for $4,000 to balance the journal entry. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. Contra liability accounts, like discounts on notes or bonds payable, decrease the balance of a liability. For instance, a company may offer a discount to prompt early payment from its customers, resulting in a contra liability account.

• A contra account is a general ledger account that offsets the balance of a corresponding account with which it’s paired.
• Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset’s net value or book value.
• Accumulated depreciation is the total of all depreciation that has been charged to existing fixed assets such as equipment and buildings.
• Generally in the financial statements the revenue account would be offset against the contra revenue account to show the net balance.
• There are three commonly used contra revenue accounts, which are noted below.
• All three values can be useful for investors depending on what they’re looking for.
• Contra equity reduces the total number of outstanding shares on the balance sheet.