Discount on Bonds Payable is a contra liability account with a debit balance that reduces the normal credit balance of its parent Bonds Payable liability account in order to present the net value of payables on a company’s balance sheet. Obsolete, Unsold and Unusable Inventory are contra asset accounts with a credit balance that reduce the normal debit balance of the main Inventory asset account in order to present the net value of inventory on allocating account dollars a company’s balance sheet. Contra asset accounts include allowance for doubtful accounts and the accumulated depreciation. 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.
Income Statement
Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount. 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.
A debit will be made to the bad debt expense for $4,000 to balance the journal entry. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. Unearned revenue is not a contra revenue account because it records deferred earnings for prepaid goods and services that are yet to be delivered and earned in the future, which are reported as a standard liability with a normal credit balance on a balance sheet.
- Another description of a contra expense account is an account that reduces or offsets the amounts reported in another general ledger expense account(s).
- Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation.
- The company’s income statement will report the combination of the amounts in accounts 4210 and 4211 in order to show the company’s actual expense of $8,000 ($10,000 minus $2,000).
- Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns.
- Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance.
Allowance for Doubtful Accounts, also known as a Provision for Bad Debts, is a contra asset account with a credit balance that reduces the normal debit balance of the Accounts Receivable asset account in order to present the net value of receivables on a company’s balance sheet. 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.
What is Contra Account?
A contra liability account is not classified as a liability, since it does not represent a future obligation. In the financial statements the purchases account would be offset against the contra expense accounts to show the net purchases. 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.
How to Record a Contra Account
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. 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. Hence, the “Accounts Receivable, net” line item on the balance sheet adjusts for the allowance to display a more realistic value of A/R and the cash payments to be received, so investors are not misled or caught off guard by sudden decreases in a company’s A/R.
Contra expense accounts are rarely used, because organizations find it to be easier to record third-party payments directly against an expense account. 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.
The Contra Asset Account
Another description of a contra expense account is an account that reduces or offsets the amounts reported in another general ledger expense account(s). Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. 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.
GAAP, the allowance for doubtful accounts represents management’s estimate of the percentage of “uncollectible” accounts receivable (i.e. the credit purchases from customers that are not expected to be paid). For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance. Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock. The difference between an asset’s account balance and the contra account balance is known as the book value. An expense account which is expected to have a credit balance instead of the typical debitbalance. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available.
Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount. For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. 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.
There did you have any interest or dividend income 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. Contra revenue accounts reduce revenue accounts and have a debit 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.
What Is a Contra Liability Account
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). Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.
The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account. The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold. Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a creditbalance.
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. Contra equity reduces the total number of outstanding shares on the balance sheet.