Another description of a contra expense account is an account that reduces or offsets the amounts reported in another general ledger expense account(s). Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement. A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity). However, that $1.4 billion is used to reduce the balance of gross accounts receivable.
How to Present Contra Accounts on Financial Statements
Likewise, when you pay a bill, your cash account is reduced (credited) because you’re lowering the balance. 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. By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes. For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately. Showing contra assets on your balance sheet allows potential investors to see how you write-down a depreciable asset, such as a piece of equipment.
When to Use a Contra Expense Account
If contra assets appear in the credit column, record contra liabilities on side. Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value. For example, GAAP accounting (or generally accepted accounting principles) requires fixed assets to be reported at cost on the balance sheet, but, over time, that value depreciates as the assets are used. The balance sheet will show a gross fixed assets value, a contra account value for accumulated depreciation, and a net value. All three values can be useful for investors depending on what they’re looking for.
Asset Contra Account
Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities includes discounts on notes or bonds payable. Or, if the contra liability account balance is immaterial, the accounting staff could elect not to keep a balance in the account at all.
These deductions are a common part of doing business, especially if you are trying to retain customers by offering them discounts from the list prices of your goods and services. 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). contra revenue account 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.
How to Record a Contra Account
Discount on notes payable and discount on bonds are examples of contra liability accounts. By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company. For example, if a company just reported equipment at its net amount, users would not be able to observe the purchase price, the amount of depreciation attributed to that equipment, and the remaining useful life. Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset. Contra revenue is a deduction from the gross revenue reported by a business, which results in net revenue.
Allowance for doubtful accounts
- The account is typically used when a company initially pays for an expense item, and is then reimbursed by a third party for some or all of this initial outlay.
- Are you looking for a way to account for accumulated depreciation, returned merchandise, or damaged inventory?
- Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value.
- When a company gives a discount to customers in an effort to convince them to buy its goods or services, it is recorded in the discount on sales account.
- This depreciation is saved in a contra asset account called accumulated depreciation.