Contra Account: A Complete Guide + Examples

The assets are always shown on the left-hand side, and the liabilities are always displayed on the right-hand side. However, that $1.4 billion is used to reduce the balance of gross accounts receivable. 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.

Understanding Contra Revenue: A Comprehensive Guide for Businesses

• Maintaining contra revenue accounts empowers you to maintain healthier and more realistic expectations of financial outcomes—no rose-tinted glasses here.
• Contra revenue analysis helps drive informed decision-making, leading to improved profitability, customer relationships, and overall financial performance.
• Contra liabilities are common in companies that sell bonds to raise capital.
• Any products that are sold at a discount or returns are deducted from gross revenue to produce net revenue as the top line on the income statement.
• Contra accounts play an important role in accounting by helping businesses track certain aspects of their finances more accurately.

Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. 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. When researching companies, the financial statement is a great place to start. Home Depot also devotes footnote 4 to its share repurchase program and reports that the company is authorized by its board to repurchase $20 billion in shares. Angela is certified in Xero, QuickBooks, and FreeAgent accounting software.

Example of a contra account

From studying the basics of debit and credit, balance sheet accounts have a healthy balance. Maintaining consistent documentation of all transactions related to these accounts is vital. Ensure every entry has corresponding documentation—such as receipts or return authorizations—to back up figures reported during audits or reviews.

Conclusion for Contra in Accounting

For example, a bond with a principal amount of $1,000 may be sold for only $950. The bond is listed on the balance sheet at the full amount of $1,000, but the cash received is just $950, so a contra liability for the discount is listed to make the entry balance. Accumulated depreciation is the total of all depreciation that has been charged to existing fixed assets such as equipment and buildings. There can be hidden value in stocks that have a lot of fully depreciated buildings. Companies like to depreciate assets as quickly as possible to get the tax savings, so the balance sheet may not state the true value of fixed assets. It can help companies see the complete picture of their income and expenses and their equity or net worth.

Diving into Different Types of Contra Accounts

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. By keeping the original dollar amount intact in the original account and contra revenue meaning 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.

This type of account could be called the allowance for doubtful accounts or a bad debt reserve. The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. The amount is reported on the balance sheet in the asset section immediately below accounts receivable. 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. This presentation separates them from positive asset balances for clear visibility of the adjustments.

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. If the return or allowance involves a refund of the customer’s payment, „Cash“ is credited. Or, a payable account is credited if the refund is to be made at a future date.

A contra asset account is an asset account where the account balance is a credit balance. It is described as “contra” because having a credit balance in an asset account is contrary to the normal or expected debit balance. (A debit balance in a contra asset account will violate the cost principle.) Learn more about contra asset accounts. For instance, if a company has a plant asset such as Equipment with a debit balance of $92,000 and the account Accumulated Depreciation has a credit balance of $50,000, the carrying amount (or book value) of the equipment is $42,000. When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense.

This lesser-known but essential element helps businesses accurately report their net sales by offsetting gross revenue with returns, allowances, and discounts. Understanding how these accounts work not only sharpens your financial reporting but also unlocks insights into customer behavior and smarter business decisions. Let’s break down what contra revenue accounts are, why they matter, and how to manage them effectively. For instance, when a company buys back their own shares, they register them in a ‘Treasury Stock’ contra equity account, which reduces total shareholders’ equity. If a customer returns a product, the ‘Sales Returns’ contra revenue account lowers the total sales revenue, reflecting the true income.

The sales discounts contra revenue account records the discounts given to customers on sales made to them, normally a cash or settlement discount. The account is normally a debit balance and in use is offset against the revenue account which is normally a credit balance. Consequently the net balance of the two accounts shows the net value of the sales after discounts. To illustrate the contra revenue account Sales Returns and Allowances, let’s assume that Company K sells $100,000 of merchandise on credit.