Contra Accounts Examples & How They Work
Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. The money left over after a company supports operations can be a snapshot of its financial health. Contra accounts are confusing at first, but, with a little study, understanding them becomes second nature.
The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. 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.
Is Unearned Revenue a Contra Account?
Let’s go over how they work and what the main types are, and then finish with an example. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.
A contra expense account is an account used to reduce the amount of an expense without changing the balance in the main expense account. Examples of contra expense accounts include Purchase Returns, Purchase Discounts, and Advertising Reimbursements. When recording assets, the difference between the asset’s account balance and the contra account balance is the book value of the asset. The balance in the allowance for doubtful accounts is used to find out the dollar value of the current accounts receivable balance that is deemed uncollectible. The balance sheet shows the amount in the asset section underneath the accounts receivable. The net value of both these figures is usually reported on a third line.
Contra equity and contra revenue
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. Discount on Notes Receivable is a contra asset account with a credit balance that reduces the normal debit balance of its parent Notes Receivable asset account in order to present the net value of receivables on a company’s balance sheet. Contra revenue is a deduction from the gross revenue reported by a business, which results in net revenue.
- 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.
- The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets.
- In other words, its expected balance is contrary to—or opposite of—the usual credit balance in a revenue account.
- Examples of revenue contra accounts are Sales Discounts, Returns and Allowances.
- The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet.
- That is because some of the bonds are issued at a discount, so this reduces the balance of their bonds payable.
By accounting for returns, allowances, and discounts, StyleMart can track its actual revenue more effectively and make more informed decisions about its pricing, inventory management, and customer relationship strategies. For instance, if a company has a plant asset such as Equipment with a debit balance of $92,000 and the account Accumulated Depreciation has a credit balance of $50,000, the carrying amount (or book value) of the equipment is $42,000. Allowance for doubtful accounts is netted from the accounts receivable balance. The company predicts which accounts receivable won’t be paid by customers and writes those off. When the account receivable is written off, it is added to bad debt expense on the income statement and placed in the contra account.
The Contra Asset Account
A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet. Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt. Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value.
Unlike an asset which has a normal debit balance, a contra asset has a normal credit balance because it works opposite of the main account. The first time a contra asset account is recorded in a journal entry, it is to be deducted from the expense. For example, when the credit amount in allowance for doubtful accounts increases, it is also recorded in the bad debt expense as a debit increase. By using contra revenue accounts, financial statement users can gain a more accurate and detailed understanding of a company’s revenue position, allowing for better financial analysis and decision-making. Contra revenue accounts help in presenting the net revenue, which is the revenue earned by the company after accounting for any returns, allowances, and discounts.
Contra asset accounts
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Why should one include contra accounts on a balance sheet?
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