A contra asset is paired with an asset account to reduce the value of the account without changing the historical value of the asset. Examples of contra assets include Accumulated Depreciation and Allowance for Doubtful Accounts. Unlike an asset which has a normal debit balance, a contra asset has a normal credit balance because it works opposite of the main account. Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value. 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. The balance sheet will show a gross fixed assets value, a contra account value for accumulated depreciation, and a net value.

Examples of revenue contra accounts are Sales Discounts, Returns and Allowances. Contra revenue is a deduction from the gross revenue reported by a business, which results in net revenue. Contra revenue transactions are recorded in one or more contra revenue accounts, which usually have a debit balance (as opposed to the credit balance in the typical revenue account). There are three commonly used contra revenue accounts, which are noted below. Sales returns, sales allowance and sale discounts are different examples of contra revenue accounts.

Contra Account Definition in Accounting

The two most common contra accounts are the allowance for doubtful accounts/bad debt reserve, which is subtracted from accounts receivable, and accumulated depreciation, which is subtracted from fixed assets. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts reduce accounts receivable, while accumulated deprecation is used to reduce the value of a fixed asset.

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. 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.

What is a contra asset?

To illustrate the contra revenue account Sales Returns and Allowances, let’s assume that Company K sells $100,000 of merchandise on credit. 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. Assets, or what is owned by the business, are recorded in a company’s general ledger and appear on the balance sheet.

(Or so we’ve been told.) Reach out to us today for all of your bookkeeping and business consulting needs. As you prepare for your first accounting exam covering chapters 1 to 4 of your textbook, mastering the fundamentals is the key to success. A company receives rebates for advertising it does on behalf of brands it carries in its stores. For example, a grocery store displays advertisements for a national brand in its weekly flyer.

Sometimes this guess is based on physical use but most often is determined based on time utility. Depreciation is accumulated or added together over several accounting cycles and is recorded in an offsetting or contra account called ‘Accumulated Depreciation’. The primary account identifies the full amount paid for the original assets within that group and the accumulated depreciation identifies the ‘GUESS’ of how much has been consumed since the initial purchase. As asset accounts have debit balances, contra asset account will have credit balance.

Related investing topics

Studying for your first accounting exam can be both exciting and a bit overwhelming. However, with the right approach and a positive attitude, you can master the subject and excel in your exam. The purpose of the Allowance for Doubtful Accounts is to track the reduction in the value of the asset while preserving the historical value of the asset. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. If you are not there, odds are your company doesn’t have the proper systems, programs, processes and controls in place to achieve proper levels of profit.

A contra account is an account that is used to offset another account. The balance in the contra account is reduced when the corresponding asset or liability it is paired with is disposed of. The allowance method of accounting enables a company to determine the amount reasonable to be recorded in the contra account. To record a revenue contra account, the company must be able to determine how much the contra account is. 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.

Contra Revenue Account

Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value. 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. The first time a contra asset account is recorded in a journal entry, it is to be deducted from the expense.

• There are different types of Contra Accounts and the most common are contra asset, contra liability, contra equity and contra revenue accounts.
• Basically, contra accounts are utilized to help present clearer information to readers of financial reports.
• When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value.
• For those industries requiring higher threshold’s of knowledge, certification, or licenses, the net profit must be greater than 7% to compensate for these additional forms of investment.

If you have buildings or equipment that you rent out on the side, you need to make a Rent Revenue account. Revenue does not show you how much your business actually has during a period. Profit shows you the amount your business gains or loses after you deduct expenses.

Any products that are sold at a discount or returns are deducted from gross revenue to produce net revenue as the top line on the income statement. Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount.

For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets. 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 costs, which can make tax preparation more difficult and time-consuming.

Assets appear with a positive balance because they are recorded as a debit to the account. A negative balance, or credit entry, in an asset account, usually indicates a mistake or is accompanied by an explanation. Contra assets are a rare exception as they are recorded as a credit balance and appear as a negative number. A debit entry in a contra asset account is unnatural and most likely indicates an incorrect journal entry. A contra account is a negative account that is netted from the balance of another account on the balance sheet.

Each year of an asset’s life, another year of Depreciation Expense is recorded. The offset to the Depreciation Expense account is Accumulated Depreciation. If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative. On the other hand, if you’re looking at a high-flying growth stock that reports new revenue growth records each quarter but has a massive allowance for doubtful accounts, there may be problems ahead.

Contra AccountDefinition, Types, Uses, and How to Set them Up

If a company has a high or fast-growing allowance as a percentage of accounts receivable, keep a close eye on it. It could be growing with bad accounts, and cash flow will be affected. Examples eight processes of accounting of contra accounts include allowance for doubtful accounts, reserve for obsolete inventory, and accrued liabilities. Each of these accounts helps to offset another account on the balance sheet.

In other words, contra sales revenue is the difference between gross revenue and net revenue. The net Revenue balance on an income statement is calculated as gross Revenue minus all contra-revenue items like Sales Returns, Allowances and Discounts. Contra revenue account is an opposite account to revenue, which decreased gross revenue balance and the result is called net revenue. Contra account is the opposite account, related to the main account. The aim of contra account is to reduce balance of the main account and provide a separate and clear data in the accounting on the substance of such decrease. Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a credit
balance.

A contra liability is an account in which activity is recorded as a debit balance is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as contra asset accounts. It is not classified as a liability since it does not represent a future obligation. There are different types of Contra Accounts and the most common are contra asset, contra liability, contra equity and contra revenue accounts.