contra account definition and meaning

contra revenue account list

Other examples include (1) the allowance for doubtful accounts, (2) discount on bonds payable, (3) sales returns and allowances, and (4) sales discounts. For example net sales is gross sales minus the sales returns, the sales allowances, and the sales https://business-accounting.net/what-is-receipt-of-payment-examples-how-to-create/ discounts. The net realizable value of the accounts receivable is the accounts receivable minus the allowance for doubtful accounts. There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue.

An account with a balance that is the opposite of the normal balance. For example, Accumulated Depreciation is a contra asset account, because its credit The Basic Accounting Equation Formula & Explanation balance is contra to the debit balance for an asset account. This is an owner’s equity account and as such you would expect a credit balance.

Why Is Contra Revenue Important For Bookkeeping?

A contra revenue account allows a company to see the original amount sold and to also see the items that reduced the sales to the amount of net sales. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete. Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods. In this scenario, a write-down is recorded to the reserve for obsolete inventory. A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity). It is important to realize that unearned revenue is not a contra revenues account.

Thus, the natural balance of a contra account is always the opposite of the account with which it is paired. Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements. Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. 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 Your Guide to Full Charge Bookkeeping in order to present the net value of payables on a company’s balance sheet. 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. Discount on Notes Receivable is a contra asset account with a credit balance that reduces the normal debit balance of its parent Notes Receivable asset account in order to present the net value of receivables on a company’s balance sheet.

Contra Asset, Contra Liability and Contra Equity

Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. A delivery van is purchased by a business to use in delivering product and picking up materials. The company uses Straight-Line Depreciation to track the loss of value of the asset over time.

contra revenue account list

Instead, it is reported at its full amount with an allowance for bad debts listed below it. Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. These contras reduce the equity account and carry a debit balance. Contra equity reduces the total number of outstanding shares on the balance sheet.

Contra Revenue Sales Discount Illustration

In other words, contra revenue is a deduction from gross revenue, 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. The purpose of the Owner’s Withdrawal account is to track the amounts taken out of the business without impacting the balance of the original equity account.

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. 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. Revenue is shown on the income statement as a credit, it is the amount of revenue a business earns in a period. It might be important for a business to track the full cost of sales less contras to see the full picture. In this example, the accounts receivable is 10,000, and the allowance for doubtful debt contra account is 1,000, leaving a balance of 9,000.

The Contra Revenue Account

It will debit Accounts Receivable for $100,000 and credit to Sales for $100,000. If a customer returns $500 of this merchandise, Company K will debit Sales Returns and Allowances for $500 and will credit Accounts Receivable for $500. Company K’s income statement will report the gross Sales of $100,000 minus the sales returns and allowances of $500 and the resulting net sales of $99,500.

  • If this is part of your business model, you’ll want to record every refund, return or discount in your contra revenue account to help you better understand the differences between your gross revenue and the net revenue.
  • Contra asset accounts include allowance for doubtful accounts and accumulated depreciation.
  • Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off.
  • Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements.
  • 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.
  • Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting.

Leave a Reply

Your email address will not be published. Required fields are marked *