What is a Contra Account?

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. In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000. If the asset account had a credit balance or the contra asset account had a debit balance, this would indicate an error in the journal entries. Home Depot reports net receivables and net property and equipment, implying that both are reduced by contra assets. We’ll need to dig into the footnotes to find out what the contra accounts are. Contra liabilities are common in companies that sell bonds to raise capital.

• Companies bury them in the footnotes and often don’t break out the actual calculation.
• Contra accounts allow you to show the amounts that offset a paired related account.
• The purpose of the Sales Returns account is to track the reduction in the value of the revenue while preserving the original amount of sales revenue.
• If a customer returns $500 of this merchandise, Company K will debit Sales Returns and Allowances for $500 and will credit Accounts Receivable for $500.
• In this way, a contra asset (credit) lowers the overall value of your accounts receivables (debit) on the balance sheet.
• In the above example, the debit to the contra liability account of $100 lets the company recognize that the bond was sold at a discount.
• A contra account provides missing context by pairing it with a related account.

What Is a Contra Account?

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. In finance, a contra liability account is one that is debited for the explicit purpose of offsetting a credit to another liability account. In other words, the contra liability account is used to adjust the book value of an asset or liability.

What is a Contra Account?

In this way, the historical cost, the amount of write-off, and the book value of an asset can always be seen on the balance sheet. In footnote 3, the company reports, “Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021.” When the original dollar amount is kept in the original account and a separate account is used for recording the deduction, the resulting financial information becomes more transparent and helpful for stakeholders. For example, a building is acquired for $20,000, that $20,000 is recorded on the general ledger while the depreciation of the building is recorded separately. Get instant access to video lessons taught by experienced investment bankers. To compensate for those potential deadbeat customers, you can use a Bad Debts account to serve as a contra for your A/R.

How can businesses effectively track and record contra-revenue transactions?

However, these vehicles have experienced significant wear and tear in the intervening years. And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more.

• These contra revenue accounts tend to have a debit balance and are used to calculate net sales.
• A contra expense account is an account used to reduce the amount of an expense without changing the balance in the main expense account.
• A liability that is recorded as a debit balance is used to decrease the balance of a liability.
• It is important to realize that unearned revenue is not a contra revenues account.
• This is important for accurate financial reporting and compliance with…

Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value. When the amount recorded in the contra revenue accounts is subtracted from the amount of gross revenue, it equals the net revenue of a company. In case a customer returns a product, the company will record the financial activity under the sales return account. The use of contra accounts ensures the accuracy of financial accounting records, as the value of the original accounts is not directly reduced.

Everything You Need To Master Financial Modeling

Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements. Given that liabilities have a credit balance, ensure that all your contra liabilities accounts have debit balances. Discount on notes payable and discount on bonds are examples of contra liability accounts. 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.

Contra Revenue Sales Returns Illustration

The sales allowance shows the discounts given to customers when returning the product. This is done to entice customers to keep products instead of returning them. Nor would it count as a liability as it does not reflect a future obligation. 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.

If you’re the one managing your company’s books of accounts, be sure to report the contra account on your financial statement on the line item directly beneath the main account. A normal asset has a debit balance, while a contra asset sits against this to show the net balance of contra revenue account both assets on your financial statement. Are you looking for a way to account for accumulated depreciation, returned merchandise, or damaged inventory? You can use contra accounts to record the goods your customers return, inventory that gets damaged, and equipment depreciation.

Double Entry Bookkeeping

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). Mismanagement of contra-revenue accounts can lead to inaccuracies in financial reporting and affect a company’s profitability. It’s crucial to have accurate records to make informed business decisions.

• A contra account is a negative account that is netted from the balance of another account on the balance sheet.
• The company records the discounted portion in its contra account under Sales Discounts in this scenario.
• Now, if that sounded like a lot of mumbo-jumbo jargon to you, don’t worry.
• You may want to first classify contra accounts as contra asset accounts, contra liability accounts, contra equity accounts, or contra revenue accounts before accounting for any transaction.