Examples of Fixed Assets are Vehicles, Equipment, and Buildings. Each year of an asset’s life, another year of https://online-accounting.net/ Depreciation Expense is recorded. The offset to the Depreciation Expense account is Accumulated Depreciation.
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. In double entry bookkeeping terms, a contra expense account refers to an account which is offset against an expense account. Assume that a company uses a contra expense account to record the amounts that employees paid toward the company’s health insurance costs.
What Is the Difference Between an Inventory Write-Off & Inventory Reserve?
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. Discount on Bonds Payable is a contra liability account with a debit balance, which is contrary to the normal credit balance of its parent Bonds Payable liability account. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. The following are examples of contra expense accounts used in double entry bookkeeping. Expense accounts and the contra expense accounts with which they are paired are typically combined in the income statement in a single line item, so that readers are not aware that a contra account even exists. Contra expense accounts have a natural credit balance, as opposed to the natural debit balance of a typical expense account.
- Accumulated depreciation reflects the reduction in value of a fixed asset.
- Purchase returns, allowances and discounts are all examples of contra expense accounts.
- In other words, contra revenue is a deduction from gross revenue, which results in net revenue.
Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees. Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens »publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa. You can set the default content filter to expand search across territories.
What is a Contra Account?
The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock. This type of account could be called the allowance for doubtful accounts or a bad debt reserve. The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. The amount is reported on the balance sheet in the asset section immediately below accounts receivable.
Examples of revenue contra accounts are Sales Discounts, Returns and Allowances. 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. Allowance for Doubtful Accounts, also known as a Provision for Bad Debts, is a contra asset account with a credit balance that reduces the normal debit balance of the Accounts Receivable asset account in order to present the net value of receivables on a company’s balance sheet. A contra expense account is a type of account in financial accounting that offsets the balance of a corresponding expense account.
Chart of Accounts Listing of Typical Contra Accounts:
Since I want to record third-party vendors services provided to me that are a part of the direct cost of providing the service I sell to my customers, I am going to create a Product / Service that I buy (not sell) and map it to the COG Account I just created. 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 the Accumulated Depreciation account is to track the reduction in the value of the asset while preserving the historical cost of the asset.
- Assume that a company uses a contra expense account to record the amounts that employees paid toward the company’s health insurance costs.
- Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.
- Examples of contra expense accounts include Purchase Returns, Purchase Discounts, and Advertising Reimbursements.
- The investors paid only $900,000 for these bonds in order to earn a higher effective interest rate.
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. Of that amount, it is estimated that 1% of that amount will become bad debt at some point in the future. This means that the $85,000 balance is overstated compared to its real value. 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.
Contra Revenue Defined
A key example of contra liabilities includes discounts on notes or bonds payable. Contra liability accounts are not as popular as contra asset accounts. Purchase Discounts, Returns and Allowances are contra expense accounts with a credit balance that reduce the normal debit balance of the main Purchase Expense account in order to present the net value of purchase expenses in a company’s income statement. Accumulated Depreciation is a contra asset account with a credit balance that reduces the normal debit balance of Property, Plant and Equipment fixed assets in order to present the net value of long-term capital expenses questions assets on a company’s balance sheet. Expense Reimbursement is a contra expense account with a credit balance that reduces the normal debit balance of its related parent Expense account in order to present the net value of business expenses in a company’s income statement, such as the employee portion of health insurance benefits. Sales Discounts, Returns and Allowances are contra revenue accounts with a debit balance that reduce the normal credit balance of the main Sales Revenue account in order to present the net value of sales generated by a business in the revenue section of the company’s income statement.
The benefit of using the contra expense account is that the company’s managers can see in account 4210 the total amount that the company paid to the health insurance company. Then in account 4211 they can see the portion of the cost that was paid by the employees. The company’s income statement will report the combination of the amounts in accounts 4210 and 4211 in order to show the company’s actual expense of $8,000 ($10,000 minus $2,000). A contra expense is an account in the general ledger that is paired with and offsets a specific expense account. The account is typically used when a company initially pays for an expense item, and is then reimbursed by a third party for some or all of this initial outlay.
Revenue or Contra Expense
Examining a trend line of the monthly additions to a contra expense account is a good way to determine whether any third party payments were not made to the company, or if two of these payments were incorrectly recorded within the same month. July 12Wells Fargo announced plans to the cut just over 100 employees in a Florida WARN notice, with layoffs affecting positions in the state—the bank’s latest cuts after it slashed more than 100 employees in two rounds of layoffs in September, multiple outlets reported. August 15SecureWorks announced layoffs affecting 15% of its workforce (300 employees) as well as plans to reduce its real estate portfolio in an SEC filing, marking the company’s second round of cuts this year, following its decision to cut another 9% of its then 2,150 employees in February. August 17Phillips 66, a Houston-based oil giant, will slash 175 full-time employees and another 100 contracted workers, multiple outlets reported this week, following the company’s decision late last year to axe 1,100 positions in a cost-cutting effort aimed at saving $500 million. As can be seen using the two accounts, allows information about the original sale to be maintained on the revenue account, and details of the sale returns to be maintained on the sales returns contra revenue account.
In the financial statements the asset a/c would be offset against the contra asset a/c to show the net balance. In bookkeeping terms, a contra asset account refers to an account which is offset against an asset account. 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. 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). The purpose of a contra expense account is to record a reduction in an expense without changing the balance in the main account.
Short-Term Portion of Long-Term Debt, or Current Portion of Long-Term Debt (CPLTD), is a contra liability account with a debit balance that reduces the normal credit balance of the main Non-Current Debt liability account in order to present the net value of borrowings on a company’s balance sheet. 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. Owner’s Draw is a contra equity account with a debit balance that records withdrawals and distributions of business assets for owner’s personal use to reduce the normal credit balance of Owner’s Equity and report the net value on a balance sheet of a sole proprietorship or partnership business. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts reduces accounts receivable.
Therefore, a contra expense account that contains a debit balance must have a negative ending balance. Generally in the financial statements the revenue account would be offset against the contra revenue account to show the net balance. In bookkeeping, a contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit (negative) balance.