What is Contra Account? Definition + Journal Entry Examples

Each of these accounts helps to offset another account on the balance sheet. For instance, the allowance for doubtful accounts reduces the net amount of accounts receivable, while the reserve for obsolete inventory does the same for inventory. Similarly, accrued liabilities reduce the total amount of current liabilities.

This type is paired with the asset account, which allows a business to record the original price or value of the asset at time of purchase. The contra asset account then allows recording of the value factoring in depreciation. Sale on account, which can also be known as a sale on credit or credit sales, refers to when businesses give a product over to a customer and customers do not have to pay until later. Credit sales are often risky because the chance of not collecting on the accounts receivable increases uncollectable percentages of credit sales, where the amount must be estimable and probable.

What Other Types of Contra Accounts Are Recorded on the Balance Sheet?

One common example is accumulated amortisation, which is a contra-asset account. This means that it acts in the opposite manner of a regular asset account. A control account allows you to easily follow the balances of related accounts by following the balance of the control account. The accounts that are related to each other (the ones with the same column heading) are said to be controlled by or linked to each other, and they share a common control account. A company creates allowances for doubtful accounts to record the portion of accounts receivable which it believes it will no longer be able to collect.

These memos may correspond to different customers, different reasons for the credit, or even multiple products/services which have been returned. The sales allowance shows the discounts given to customers when returning the product. This is done to entice customers to keep products instead of returning them.

Why should one include contra accounts on a balance sheet?

Contra accounts appear on the same financial statement as the related account. For example, an accounts receivable’s contra account is a contra asset account. This type of account can also be called the bad debt reserve or allowance for doubtful accounts. When a contra asset account is first recorded in a journal entry, the offset is to an expense. 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.

• Sales returned for a refund are posted to the contra account to reduce gross revenue or return on sales.
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• Contra accounts provide more detail to accounting figures and improve transparency in financial reporting.
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• Contra equity reduces the total number of outstanding shares on the balance sheet.

To indicate that dual posting is necessary, a diagonal line is drawn in the P.R. The seller usually issues the customer a credit memorandum showing the amount of credit granted and the reason for the return. Return of merchandise sold for cash is entered in the cash payments journal or cash book. Advisory services provided by Carbon Collective Investment LLC (“Carbon Collective”), an SEC-registered investment adviser. 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. Get instant access to video lessons taught by experienced investment bankers.

contra revenues account definition

The amount on the equity contra account is deducted from the value of the total number of outstanding shares listed on a company’s balance sheet. The allowance method of accounting enables a company to determine the amount reasonable to be recorded in the contra account. The purpose of contra-revenue accounts is to have adjusting entries for the corresponding revenue accounts. Those who are struggling with recording contra accounts may benefit from What is a Contra Revenue Account — Example and Definition utilizing some of the best accounting software currently available. 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. For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately.

• One common example is accumulated amortisation, which is a contra-asset account.
• The amount on the equity contra account is deducted from the value of the total number of outstanding shares listed on a company’s balance sheet.
• The account, therefore, has a debit balance that is opposite the credit balance of the sales account.
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• 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.
• The balance in the allowance for doubtful accounts is used to find out the dollar value of the current accounts receivable balance that is deemed uncollectible.

A contra account is used to record adjustments and transactions that have an opposing impact to report the true value of a firm’s financial statements. Contra accounts are commonly found on general ledgers where all of a business’s accounts and transactions are https://accounting-services.net/sales-tax-decalculator/ organized on a master list. The contra account is used to report the correct assets while preserving the transactions and balance of the relating account. The most common contra assets are accumulated depreciation and the allowance for doubtful accounts.

When recording assets, the difference between the asset’s account balance and the contra account balance is the book value of the asset. The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value.