What Is a Contra Account & Why Is It Important? Accounting Services

Another example of a contra asset account is the accumulated depreciation account which reduces the reporting value of capital assets. Allowance for obsolete inventory or obsolete inventory reserve are also examples of contra asset accounts. Sales returns is a contra revenue account as the figure is a negative amount net against total sales revenue. The contra revenue accounts commonly used in small-business accounting include sales returns, sales allowance and sale discounts. AccountDebitCreditSales Revenue275,000Interest Revenue150Income Summary275,150To close revenue accounts with credit balances.2. We will close sales discounts, sales returns and allowances, cost of goods sold, and all other operating and nonoperating expenses.

Sales Discounts

If the amounts of these line items are minimal, they may be aggregated for reporting purposes into a single contra revenue line item. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical can law firms measure ambition without billable hours costs, which can make tax preparation more difficult and time-consuming. Accounting terminology can be baffling at the best of times, but when you are busy running a business, your focus is on business growth and providing a high standard of product / services. Taking the time to decipher your financial statements can be burdensome and tiring.

What Percentage of Expenses Should Payroll Be?What Percentage of Expenses Should Payroll Be?

Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. This type of account could be called the allowance for doubtful accounts or a bad debt reserve. These three instances of contra revenue accounts provide valuable information to the business owner, and also to lenders and investors, regarding the overall business mission as well as the internal practices of the business itself. Your contra liabilities account will generally have a debit balance, mirroring and in opposition to the credit balance of your liabilities account. An example of a contra liabilities account is an account entitled ‘Discount on Bonds Payable’ and may refer to an instance when the bonds decreed interest rate is less than its market interest rate. Finally, the contra equity account is a shareholders’ equity account that has a net debit balance and reduces the overall equity held by a business.

What is a contra asset account?

Because contra asset accounts are used so frequently, it’s worth spending a little bit more time on them here, including common subtypes. For example, a contra account to accounts receivable is a contra asset account. This type of account could be called the allowance for doubtful accounts or 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. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances.

1. If a company offers an early payment discount (such as 1% or 2% of the invoice amount if it is paid within 10 days instead of the required 30 days) the amount of the discount is recorded in the contra revenue account Sales Discounts.
2. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.
3. For example, your Accounts Receivable account may have a contra account entitled ‘Allowance for Bad Debt’.
4. 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.
5. For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets.

Contra liability account example

Unearned revenue occurs when a client/customer pre-pays for a product or service, for example, in the instance of a contract. This revenue is listed as a current liability, not as an asset, therefore, it does not appear in the contra asset account. The hottest retail item of today can be relegated to nostalgia channels on YouTube tomorrow. And when your business still has some of these outdated, unwanted, or unusable items in your inventory, you’ll want to offset the lost value of these assets in your general ledger and balance sheet. So rather than adjusting your Inventory account, you would update its contra account — Obsolete Inventory. It is important to realize that unearned revenue is not a contra revenues account.

At the same time, our Accounts Receivable Automation software and Accounts Payable Automation software makes tracking, managing, and processing crucial assets and liabilities — and their contras — easier than ever before. There is almost always a story behind data; a clarification or historical insight attention required! cloudflare that changes the meaning behind raw figures. In a report, layering on that additional context can be easy, but in a general ledger, you have few options for conveying nuance and subtlety. Namely, within a ledger, each account is intended to contain transactions and balances of a similar type only.

Similarly, if the parent account lists entries as debits, the contra account will appear as a credit. At the same time, it is necessary to clearly and clearly set up accounting for the receipt of documents to the accounting Department. In addition, it is important, if possible, to assign the responsibility for obtaining corrected documents to the same perpetrators. This will convince the latter that it is much better to immediately monitor the correctness of the document received from contractors or from their subordinates, than to force them to make another document, eliminating errors. Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a creditbalance.

With amortization, the payment amount consists of both principal repayment and interest on the debt. The new accounting rules must be immediately communicated to the performers under the signature and leave them a copy of the guidance document. Copies of the guidance documents for the relevant areas of accounting should be in separate folders.

When a company sells its products or services to customers on credit, the company records the amount sold in its accounts receivable account. Typically, a company fails to collect all of the money owed by customers making purchases on credit. The amount a company records as allowance for doubtful accounts is the amount from its accounts receivable the company considers uncollectible. A regular asset account typically carries a debit balance, so a contra asset account carries a credit balance.

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). Consider a business that offers an early payment discount to its customers, cutting their invoiced total by 3% if they pay within 1 week of invoicing. If every single https://www.quick-bookkeeping.net/ buyer had taken advantage of the early payment discount, the company would have provided roughly $10 thousand in discounts during that same timeframe. In reality, the actual number of company discounts came closer to $5 thousand. It will debit Accounts Receivable for $100,000 and credit to Sales for $100,000.

Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. GAAP, the allowance for doubtful accounts represents management’s estimate of the percentage of “uncollectible” accounts receivable https://www.quick-bookkeeping.net/average-cost-method-formula-calculator/ (i.e. the credit purchases from customers that are not expected to be paid). This general structure can be applied across all contra types, so if the parent account has a credit, the contra account will have a debit.