Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. Contra liabilities, such as discounts on notes or bonds payable, decrease the balance of a liability. Keep reading to learn more about contra revenue accounts and what should go in them. If your company has minimal contra revenue activity, it is acceptable to record these transactions within the revenue account. Showing contra assets on your balance sheet allows potential investors to see how you write-down a depreciable asset, such as a piece of equipment. Contra assets give investors a better picture of how you use your assets over time.
Let’s go over how they work and what the main types are, and then finish with an example. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.
What Are the Different Types of Contra Accounts?
Examples include sales returns, sales allowances, and sales discounts. The equity section of the balance sheet is where the shareholder’s claims to assets are reported. The main contra equity account is treasury stock, which is the balance of all stock repurchased by the company. When a company repurchases shares, it increases the fractional ownership of all remaining shareholders.
This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000. A customer returned $100 worth of items, claiming them to be defective. Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement. This type of account could be called the allowance for doubtful accounts or a bad debt reserve.
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This would let users of the financial statements calculate the book value of the liability. Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets. In case the contra asset account is not listed in the balance sheet, it must be listed in the footnotes of the financial statement for the users to be informed. A revenues account with a debit balance instead of the usual credit balance.
And finally, contra revenue accounts, like sales discounts and allowances, reduce gross revenue to arrive at net revenue. 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. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset.
Intangible Assets Meaning in Accounting, Types, and Examples
Contra liability, equity, and revenue accounts have natural debit balances. 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.
- Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods.
- Contra revenue is a deduction from the gross revenue reported by a business, which results in net revenue.
- If your client returns $1000 of the products bought, you record Sales Returns and Allowances worth $1,000 as debit and credit $1000 as Accounts Receivable.
- Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance.
The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account. The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold. By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes.
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If you’re the one managing your company’s books of accounts, be sure to report the contra account on your financial statement on the line item directly beneath the main account. 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. The company would then have a contra liability account for the bonds. This would allow the company to track the amount of money that has been borrowed. The contra liability account would be used to offset the liability account on the balance sheet.
It is important to note that there are different types of contra accounts, each serving a specific purpose. Contra assets, such as accumulated depreciation, decrease the balance of an asset https://www.bookstime.com/ account. Contra liabilities, like discounts on notes or bonds payable, reduce the balance of a liability account. Contra equity accounts, such as Treasury stock, reduce the equity account.
The account offsets the balance in the respective asset account that it is paired with on the balance sheet. Whenever the balance of a contra asset account increases (credit to the contra asset account), the increased amount is written off as an expense and is reported in the company’s income statement. In the books, the account of the asset would have a debit contra revenue value of $100,000, and the contra asset account would have a credit value of $30,000. If the asset account had a credit balance or the contra asset account had a debit balance, this would indicate an error in the journal entries. As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find.