The accounts normally have a credit balance and in use are offset against the purchases account which is normally a debit balance. The net balance of the accounts shows the net value of the purchases made by the business for the accounting period. Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement. Examples of revenue contra accounts are Sales Discounts, Returns and Allowances.
List of Contra 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. For example, a company pays for medical insurance on behalf of its employees, which it records in an employee benefits expense account. Then, when the employee-paid portion of the expense is paid to the company by employees, these reimbursements are recorded in a benefits contra expense account. The net effect of the two accounts is a reduced total benefits expense for the company. Businesses experience a world of benefits from maintaining accurate contra account records. By reflecting the true health and value of assets, liabilities, and equity, they support a realistic assessment of financial standing.
What Is the Benefit of Using a Contra Account?
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, contra expense account examples 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. Purchase returns, allowances and discounts are all examples of contra expense accounts.
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. A contra asset account is a type of account in accounting that has a natural credit balance and is used to decrease the balance of a related asset account. It contains negative balances that offset the balance in a paired asset account on a company’s balance sheet, revealing the net value of the asset.
Accounts receivable is rarely reported on the balance sheet at its net amount.
Accurate contra account use also smoothes out budget forecasting and financial planning, as businesses are not caught off-guard by suddenly realized losses or overstated assets.
In other words, contra revenue is a deduction from gross revenue, which results in net revenue.
It is not classified as a liability since it does not represent a future obligation.
Contra Account Definition, Types, and Example
The most common one you might encounter is treasury stock—where companies buy back their own shares. It’s essentially a reverse investment; instead of pouring money in, the company is taking it back, reflecting a decrease in shareholders’ equity. This can have various strategic implications, from attempting to increase per-share earnings to trying to prevent takeovers.
A contra expense account is a general ledger expense account that will intentionally have a credit balance (instead of the debit balance that is typical for an expense account). In other words, this account’s credit balance is contrary to (or opposite of) the usual debit balance for an expense account. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. Contra asset accounts are presented on the balance sheet as reductions from the asset accounts they relate to. They typically appear just below the related asset, with their credit balances reducing the total value of the assets, showing the net amount that’s carried on the books.
There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Accumulated Depreciation is a contra asset account with a credit balance that reduces the normal debit balance of Property, Plant and Equipment fixed assets in order to present the net value of long-term capital assets on a company’s balance sheet.
However, these accounts are still useful when dealing with large quantities of reimbursements, where it is cleaner and less confusing to store the information in a separate account. Thus, the use of a separate contra expense account makes it easier to monitor the flow of expenses and reimbursements. Company A has accounts receivable of $ 5,000 with Company B. One week later, company A purchase goods from company B for $2,000 on credit, so it means that Company A has accounts payable with Company B $ 2,000. Contra Entry is the transaction that impacts both debit and credit of cash & cash equivalent. It is the transaction between cash, petty cash, bank, and other accounts under cash. Optimizing your handle on contra accounts doesn’t end with just understanding them; it’s about mastering the tools and techniques to manage them effectively.
The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset. Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value.
