Unlike an asset which has a normal debit balance, a contra asset has a normal credit balance because it works opposite of the main account. To illustrate the contra revenue account Sales Returns and Allowances, let’s assume that Company K sells $100,000 of merchandise on credit. It will debit Accounts Receivable for $100,000 and credit forensic definition to Sales for $100,000. 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. Company K’s income statement will report the gross Sales of $100,000 minus the sales returns and allowances of $500 and the resulting net sales of $99,500.
- In summary, contra accounts offer a way to accurately reflect reductions or adjustments in the value of specific accounts.
- The sales discounts account contains the amount of sales discounts given to customers, which is usually a discount given in exchange for early payments by them.
- Contra revenue accounts, such as sales discounts and returns, are recorded to calculate net sales.
- Allowance for Doubtful Accounts pairs with the Bad Debts Expense account when doing adjusting journal entries.
The reason you show a contra asset on a balance sheet is so you can see the overall net balance of a particular asset and to give investors a more accurate look into your company’s financial activity. We will define what contra accounts are, the types of contra accounts and provide examples to illustrate. Each account in a general ledger will be designated debit or credit accounts depending on whether they’re categorized as assets, liabilities, revenues or expenses.
What is a Contra Equity Account?
Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset. The following are examples of commonly-used contra asset accounts you could create to better understand your business financials. However, it’s important to keep in mind that you can create any contra account you want to more clearly describe your business — this is not an exhaustive or definitive list.
- Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory.
- Accounts receivable is rarely reported on the balance sheet at its net amount.
- The sales allowances account contains either an allowance for reductions in the price of a product that has minor defects, or the actual amount of the allowance attributable to specific sales.
- Wanting to spruce up its aging inventory, Show-Fleur purchased new, climate controlled-seats for its fleet, delivering increased comfort for passengers and a cleaner, more modern look for vehicle interiors.
- Allowance for doubtful accounts (ADA) is a contra asset account used to create an allowance for customers who are not expected to pay the money owed for purchased goods or services.
For industries that rely on natural resources — mining, logging, oil, gas — depletion tracks the gradual exhaustion of the raw material in question, offsetting that loss in value against the initial appraisal of the land. So an Accumulated Depletion account would serve as the contra for the parent Fixed Asset account. Many regard accounting and bookkeeping as annoying necessities and try to do everything on their own to cut costs. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. Taking the example of CCC again, the company has $50,000 in accounts receivable at year-end of December 31. CCC estimates that 5% of accounts receivable will most likely be unrecoverable.
Contra Account Examples
When the amount is material, the line item is typically presented separately on the balance sheet, below the liability account with which it is paired. The debit balances in the above accounts are amortized or allocated to an expense, such as Interest Expense over the life of the bonds or notes payable. The amount in the accumulated depreciation account is deducted from the assets of a company, such as buildings, vehicles and equipment.
Contra liability accounts are typically used for bonds, notes payable, and other indebtedness. If a listed company purchases its own shares from the open market, it will have to debit the treasury stock account in order to record the transaction. 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. In other words, contra revenue is a deduction from gross revenue, which results in net revenue. 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.
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If the amounts of these line items are minimal, they may be aggregated for reporting purposes into a single contra revenue line item. Generally in the financial statements the revenue account would be offset against the contra revenue account to show the net balance. A contra revenue account is a revenue account that is expected to have a debit balance (instead of the usual credit balance). In other words, its expected balance is contrary to—or opposite of—the usual credit balance in a revenue account. The sales discount and sales return are Contra revenue accounts, as it decreases the sales revenue.
And finally, contra revenue accounts, like sales discounts and allowances, reduce gross revenue to arrive at net revenue. When it comes to recording contra accounts, there are different methods that can be used. For example, when dealing with contra asset accounts, such as accumulated depreciation, the offset is made to an expense account.
For example, this analysis might indicate that your business has product quality problems or servicing issues that can be corrected. In addition, you can examine the impact of sales discounts on increases in sales, to see if it makes sense to continue offering discounts in order to boost profits. On the income statement, the net sales revenue will be reported as $47,000 ($50,000 – $2,000 – $1,000), reflecting the impact of the contra revenue accounts. In summary, contra accounts offer a way to accurately reflect reductions or adjustments in the value of specific accounts.
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 subsidiary ledger includes all cash (or cash equivalent) payments to the suppliers, vendors, or for any other expenses a business might have. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. The sales allowances account contains either an allowance for reductions in the price of a product that has minor defects, or the actual amount of the allowance attributable to specific sales. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.