In other words, contra revenue is a deduction from gross revenue, which results in net revenue. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. When the two balances are offset against each other they show the net balance of both accounts.
Sales Allowances
- The purpose of the Owner’s Withdrawal account is to track the amounts taken out of the business without impacting the balance of the original equity account.
- The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment.
- Sometimes, we have an ancillary balance whose normal balance is the same as that of the parent account.
- It is because clubbing together dissimilar transactions impedes any analysis.
- And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand.
This will ensure the net value of accounts receivable at year-end is not overstated. Allowance for uncollectible accounts, or allowance for doubtful accounts, is one of the most common contra contra expense account current asset accounts. The dollar balance in the allowance for uncollectible accounts is the amount you don’t expect to collect, and this offsets the amount you report in accounts receivable.
Understanding contra accounts
If a company has a high or fast-growing allowance as a percentage of accounts receivable, keep a close eye on it. 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. A contra expense is an account in the general ledger that is paired with and offsets a specific expense account. 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.
Related AccountingTools Courses
- So rather than adjusting your Inventory account, you would update its contra account — Obsolete Inventory.
- 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.
- To convert your invoice management efforts to an electronic format that can easily share data with other financial systems, businesses can leverage Invoiced’s E-invoice Network.
- If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts.
- We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R).
- When considering all of the money currently owed to your business that’s recorded in your Accounts Receivable (A/R) line item as an existing asset, there’s a good chance that not all of those customers are going to pay you back in full.
For example, when a line item on your balance sheet presents the balance of accounts receivable, report the value of allowance of uncollectible accounts below the accounts receivable line. Be sure to enter the contra account on the opposite column of the account they’re offsetting. If contra assets appear in the credit column, record contra liabilities on side.
- So an Accumulated Depletion account would serve as the contra for the parent Fixed Asset account.
- Discount on notes payable and discount on bonds are examples of contra liability accounts.
- This general structure can be applied across all contra types, so if the parent account has a credit, the contra account will have a debit.
- 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.
- For instance, the company might debit its expense account 4210 Employee Health Insurance Expense when recording the insurance company’s invoice of $10,000.
Presentation of Contra Expenses
For example, a grocery store displays advertisements for a national brand in its weekly flyer. The national brand gives the grocery store cash, reducing the overall cost of printing the flyer. My Accounting Course is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.
What Is a Contra Account?
Contra accounts are worth a look
