What is a Contra Account?

Each of these contra accounts serves to provide more detailed information about the transaction history of the related main account. By tracking contra accounts, a company can make more informed decisions about asset management, liability settlement, and overall financial planning. Nor would it count as a liability as it does not reflect a future obligation. When a client pays in advance for a service or product, unearned revenue occurs. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. The contra accounts will be grouped in the same category on the balance sheet or income statement as their related accounts.

An example of this can be found in the retail industry where the goods of the company do not meet the expectations of their clients. This can also be applied in the hospitality industry where the services do not satisfy the customer’s needs. With sale returns contra revenue account, the employer will be provided with essential feedback that can contribute to their financing and also to their processes. For liability and revenue accounts, credit transactions will increase and debit transactions will decrease the account balances. 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 term “contra” means “against,” which perfectly describes the role these accounts play in your finances – they are going against the norm. 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. To compensate for those potential deadbeat customers, you can use a Bad Debts account to serve as a contra for your A/R.

Types Of 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. 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 tax deductions guide 20 popular breaks in 2021 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. Make sure that you report contra accounts on the same financial statement as the related accounts.

• For instance, if a company buys back its own shares, it records the transaction in the Treasury stock account to reflect the reduction in shareholder’s equity.
• In the example above, before returning goods by a customer sales were $50,000, after reducing $10,000 now sales revenue balance is $40,000.
• If contra assets appear in the credit column, record contra liabilities on side.
• For a clearer understanding of contra revenue account sales allowances and returns, I’m going to explain it by using an illustration.
• Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet.

So rather than adjusting your Inventory account, you would update its contra account — Obsolete Inventory. There is almost always a story behind data; a clarification or historical insight that changes the meaning behind raw figures. In a report, layering on that additional context can be easy, but in a general ledger, you have few options for conveying nuance and subtlety.

What Is A Contra Account?

Contra revenue accounts, such as sales discounts and returns, are recorded to calculate net sales. For instance, sales returns and allowances are recorded as a debit to the account and a corresponding credit to accounts receivable. Contra revenue accounts are used to reflect the reduction in revenue, with contra revenue contra sales relating to gross sales, and contra revenue contra revenue expense used to show the decrease in revenue. Contra revenue is a type of account in financial accounting that offsets the balance of a corresponding revenue account.

Expense Ratio: Definition and How to Calculate It

At Invoiced, we provide a suite of solutions that work together to make managing your invoicing, accounts receivable, and accounts payable seamless and easy. 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. At the same time, our Accounts Receivable Automation software and Accounts Payable Automation software makes tracking, managing, and processing crucial assets and liabilities — and their contras — easier than ever before. The hottest retail item of today can be relegated to nostalgia channels on YouTube tomorrow. And when your business still has some of these outdated, unwanted, or unusable items in your inventory, you’ll want to offset the lost value of these assets in your general ledger and balance sheet.

Contra Revenue Account: Definition and Examples in Accounting

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. If there’s an increase to allowance for uncollectible accounts, you record the same amount in the bad debt expense of your income statement. Similarly, accumulated depreciation accounts reduce the value of the fixed assets you report on your financial statements. They help keep financial accounting records clean and provide more detail to accounting figures, improving transparency in financial reporting.

Contra Liability Account

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. When a company gives a discount to customers in an effort to convince them to buy its goods or services, it is recorded in the discount on sales account. A contra account is a general ledger account with a balance that is the opposite of another, related account that it is paired with. The B/S impact is where the contra liability comes into play, i.e. the historical value of the debt is not impacted by the OID.

The discount on bonds payable amount shows the difference between the amount of cash received when issuing a bond and the value of the bond at maturity. The allowance method of accounting enables a company to determine the amount reasonable to be recorded in the contra account. When recording assets, the difference between the asset’s account balance and the contra account balance is the book value of the asset.

The main advantage of using separate contra revenue accounts is that each one provides targeted information about the individual deductions taken from sales. Since each of these deductions directly reduces your profits, it makes sense to research them in detail, to see if there are any actions that can be taken to reduce the number of deductions. For example, this analysis might indicate that your business has product quality problems or servicing issues that can be corrected.

The initial cost of this upgrade was $8 thousand per limo or $600,000 in total. This subsidiary ledger includes all cash (or cash equivalent) payments to the suppliers, vendors, or for any other expenses a business might have. CCC bought equipment and machinery worth $100,000 at the beginning of the current financial year and estimates that the equipment and machinery will depreciate by $10,000 every year. 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. The purpose of the Accumulated Depreciation account is to track the reduction in the value of the asset while preserving the historical cost of the asset.