You debit the contra revenue accounts and credit the corresponding revenue accounts. For example, when you debit the balance in sales returns account, make sure that you offset the sales revenue account with a credit balance. 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 a company’s balance sheet. To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts. Since it is a contra asset account, this allowance account must have a credit balance (which is contrary to the debit balances found in asset accounts). The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable.
- If a company has a high or fast-growing allowance as a percentage of accounts receivable, keep a close eye on it.
- 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.
- A contra revenue represents any deductions or offsets that need to be removed from gross revenue to provide a clearer understanding of actual income — such as in the example just provided.
- 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, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets.
How Does a Contra Account Work in Accounting?
The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable. It also shows the carrying (net) amount of $19,000, which you report to your firm’s balance sheet. The two most common contra accounts on a balance are accumulated depreciation and the allowance for doubtful debts. Accumulated depreciation tallies the depreciation to date of a fixed asset, such as a car or a building.
Understanding contra accounts
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. These less-frequent contra accounts come into play when you need to account for changes in the outstanding liabilities for your business. For example, when your company borrows money, you would identify that debt in a Notes Payable account. Furthermore, if you subsequently pay off that debt early and capture a discount, the contra liability account — Discount Notes Payable — would record those savings.
Examples of Contra Revenue Accounts
There 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 contra revenue account accounts and have a debit balance. Contra asset accounts include allowance for doubtful accounts and the accumulated depreciation. Examples of a contra revenue accounts include sales returns, sales discounts, and sales allowances.
FAQ: Understanding Contra Revenue
- The amount is not reported, and the net sales amount is reported on the income statement.
- Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available.
- The revenue contra accounts Sales Returns, Discounts and Allowances are subtracted from the main Sales Revenue account to present the net balance on a company’s income statement.
- Accumulated depreciation tallies the depreciation to date of a fixed asset, such as a car or a building.
- Discounts are price reductions given under specific conditions such as early payment, bulk purchases, or during promotional sales events.
- 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 debit balance in a contra asset account will violate the cost principle.) Learn more about contra asset accounts.
Examples of contra expense accounts include Purchase Returns, Purchase Discounts, and Advertising Reimbursements. The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount. This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms. Most accounts receivable would just be the time between purchase and credit card settlement. 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 sales returns account contains either an allowance for returned goods, or the actual amount of revenue deduction attributable to returned goods.
Examples of Contra Accounts
These accounts will typically help track sales discounts, product returns, and allowances (e.g., a price reduction for a good with minor defects). You may use accounting software packages, such as QuickBooks Online to set up contra accounts. Simply hit Control + N under the Chart of Accounts or Edit, then click New (to create a new account). The contra asset account of your equipment account is the accumulated depreciation of equipment. When the balance in the accumulated depreciation is $10,000 and your equipment account has a debit balance of $50,000, then the book value of your equipment is $40,000.
- Contra revenue is a deduction from the gross revenue reported by a business, which results in net revenue.
- The two most common contra accounts are the allowance for doubtful accounts/bad debt reserve, which is subtracted from accounts receivable, and accumulated depreciation, which is subtracted from fixed assets.
- You can use contra accounts to record the goods your customers return, inventory that gets damaged, and equipment depreciation.
- In other words, contra revenue is a deduction from gross revenue, which results in net revenue.
- For its day-to-day operations, the business maintains a fleet of 75 identical 2016 Ford Explorer limousines, each initially retailing at $150 thousand.
- Are you looking for a way to account for accumulated depreciation, returned merchandise, or damaged inventory?
Difference Between Depreciation, Depletion, Amortization
