These deductions are a common part of doing business, especially if you are trying to retain customers by offering them discounts from the list prices of your goods and services. Contra revenue transactions are recorded in one or more contra revenue accounts, which usually have a debit balance (as opposed to the credit balance in the typical revenue account). There are three commonly used contra revenue accounts, which are noted below. Given that liabilities have a credit balance, ensure that all your contra liabilities accounts have debit balances.
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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 what is a contra account to serve as a contra for your A/R. Shares of streaming leader Netflix have gained more than 800% over the last decade, but the stock has taken its lumps, too, still trading about 10% below its 2021 peak. The difference between an asset’s account balance and the contra account balance is known as the book value.
- A contra account is a general ledger account that offsets the balance of a corresponding account with which it’s paired.
- Sales returns occur when a customer returns a product they previously purchased, a common occurrence in retail and e-commerce.
- The balance sheet will show a gross fixed assets value, a contra account value for accumulated depreciation, and a net value.
- In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000.
- Accounting software can simplify the management of and reporting from your ledger.
What Are Examples of a Contra Asset Account?
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. 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. Regular reviews and adjustments based on comprehensive data analysis can significantly aid in maintaining healthy profit margins.
Contra equity account
At this point, it isn’t known which accounts will become uncollectible so the Accounts Receivable balance isn’t adjusted. Instead, an adjusting journal entry is done to record the estimated amount of bad debt. Accumulated Depreciation is a contra asset that pairs with Fixed Assets. Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset.
Types of contra accounts
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. 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. At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset. For example, an asset was purchased by a company for $100,000 – that is, the historical cost of the asset was $100,000 – and its contra asset counterpart has a balance of $30,000. Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost.
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.
Contra asset accounts journal entries
- Contra revenue is a deduction from the gross revenue reported by a business, which results in net revenue.
- The purpose of the Sales Returns account is to track the reduction in the value of the revenue while preserving the original amount of sales revenue.
- 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).
- The purpose of a contra expense account is to record a reduction in an expense without changing the balance in the main account.
- Taken together, the asset account and contra asset account reveal the net amount of fixed assets still remaining.
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- You may want to first classify contra accounts as contra asset accounts, contra liability accounts, contra equity accounts, or contra revenue accounts before accounting for any transaction.
- Accumulated Depreciation is a contra asset that pairs with Fixed Assets.
- 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.
- Conversely, for a contra asset account like depreciation, you would list all entries as a credit, carrying a negative total balance for the overall account.
- 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.
- A delivery van is purchased by a business to use in delivering product and picking up materials.
