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. Contra account is important as it not only allows a company to report the original amount of a transaction but also report any reductions that may have happened so that the net amount will also be reported. They are useful in preserving the historical value in the main account while presenting a write-down or decrease in a separate contra account that nets to the current book value.
Example of Contra Revenue in Sales Discounts
For example, we need to keep the face value of a bonds payable and the premium amount in separate ledger accounts even though both have credit balances. A separate account used in such a situation is sometimes called a adjunct account. Assume that a company uses a contra expense account to record the amounts that employees paid toward the company’s health insurance costs. For instance, the company might debit its expense account 4210 Employee Health Insurance Expense when recording the insurance company’s invoice of $10,000. If the company withholds $2,000 from its employees’ wages to pay part of the cost of the insurance, the company will credit its contra expense account 4211 Employee Withholdings for Health Ins. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory.
How Does a Contra Account Work in Accounting?
- The reason you show a contra asset on a balance sheet is so you can see the overall net balance of a particular asset and to give investors a more accurate look into your company’s financial activity.
- For example, GAAP accounting (or generally accepted accounting principles) requires fixed assets to be reported at cost on the balance sheet, but, over time, that value depreciates as the assets are used.
- 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).
- A debit will be made to the bad debt expense for $4,000 to balance the journal entry.
- All three values can be useful for investors depending on what they’re looking for.
- In this way, a contra asset (credit) lowers the overall value of your accounts receivables (debit) on the balance sheet.
Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. These contra revenue accounts tend to have a debit balance and are used to calculate net sales.
Doubtful Debts and Contra Assets
Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. Master accounting topics that pose a particular challenge to finance professionals.
In an accounting system, ledger accounts are designed to contain only similar transactions and/or balances. For example, we need separate accounts to hold the actual cost of property, plant and equipment (PPE) and related accumulated depreciation. If we record depreciation expense in the cost accounts directly, we will lose key information about the original cost of the assets and accumulated depreciation.
Contra liability accounts
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 in order to present the net value of payables 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.
- Emilie is a Certified Accountant and Banker with Master’s in Business and 15 years of experience in finance and accounting from corporates, financial services firms – and fast growing start-ups.
- You may use accounting software packages, such as QuickBooks Online to set up contra accounts.
- 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.
- This account serves two purposes — tracking total depreciation expenses while providing you with the accurate book value of the asset being depreciated.
- The sales allowances account contains either an allowance for reductions in the price of a product that has minor defects, or the actual amount of the allowance attributable to specific sales.
- Accumulated depreciation tallies the depreciation to date of a fixed asset, such as a car or a building.
- Whether in-house or outsourced, utilising dedicated accounting and bookkeeping teams ensures accurate recording of contra revenue.
There is no answer to contra accounts…best i can guess is that QB does NOT have the ability. Let me give you the detailed steps on how to set up a contra account for accumulated depreciation. To account for this, you would debit $50,000 in Accounts Receivable and credit $50,000 in Sales. If a client returns $1,000 worth of products, you record Sales Returns and Allowances by debiting $1,000 and crediting $1,000 to Accounts Receivable.
Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. San Mateo County was listed as the county that donated contra revenue account the most in proportion to residents’ income. Of the tax returns that itemized contributions in San Mateo County, the amount of money donated was equal to 3.5% of residents’ income, the study found.
