What Is a Contra Account? The Motley Fool

The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement. Examples of revenue contra accounts are Sales Discounts, Returns and Allowances.

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• A contra revenue account is a revenue account that is expected to have a debit balance (instead of the usual credit balance).
• For example, a grocery store displays advertisements for a national brand in its weekly flyer.
• Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement.

When researching companies, the financial statement is a great place to start. 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. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

Accumulated Depreciation as a Contra Asset

These examples illustrate how contra accounts are used in various contexts to provide a more accurate picture of a company’s financial position and performance. Overall, while maintaining contra accounts may require additional effort, the benefits they offer in terms of financial transparency and accountability make them an essential tool in statement sections accounting. At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset. Although they all aim at reducing the balance of some type of account, it is useful to have some general foundational knowledge of the different types of accounts.

• In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000.
• Such accounts are allowance for doubtful accounts and the accumulated depreciation account.
• This helps the firms to evaluate the book value of their assets and liabilities.
• There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue.
• In case the contra asset account is not listed in the balance sheet, it must be listed in the footnotes of the financial statement for the users to be informed.

By tracking contra accounts, a company can make more informed decisions about asset management, liability settlement, and overall financial planning. A contra account is an account with a balance opposite the normal accounts in its category. Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts. In other words, contra accounts are used to reduce normal accounts on the balance sheet. However, that $1.4 billion is used to reduce the balance of gross accounts receivable.

Allowance for uncollectible accounts, or allowance for doubtful accounts, is one of the most common contra current asset accounts. The dollar balance in the allowance for uncollectible accounts is the amount you don’t expect to collect, and this offsets the amount you report in accounts receivable. A normal asset has a debit balance, while a contra asset sits against this to show the net balance of both assets on your financial statement. Contra accounts allow you to show the amounts that offset a paired related account. As a small business owner, understanding how to set up contra accounts enables you to prepare and maintain accurate financial records. Each of these contra accounts serves to provide more detailed information about the transaction history of the related main account.

How are Contra Accounts Used and Reported?

Contra equity accounts carry a debit balance and reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance. A contra account offsets the balance in another, related account with which it is paired. Contra accounts appear in the financial statements directly below their paired accounts. Sometimes the balances in the two accounts are merged for presentation purposes, so that only a net amount is presented.

What Is the Benefit of Using a Contra Account?

A contra account is an account used in a general ledger to reduce the value of a related account when the two are netted together. The term “contra” means “against,” which perfectly describes the role these accounts play in your finances – they are going against the norm. In this way, the historical cost, the amount of write-off, and the book value of an asset can always be seen on the balance sheet. In footnote 3, the company reports, “Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021.” A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting.

This content was originally created by member WallStreetOasis.com and has evolved with the help of our mentors. 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. The money left over after a company supports operations can be a snapshot of its financial health. 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. Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees.

Liability Contra Account

The two most common contra accounts on a balance are accumulated depreciation and the allowance for doubtful debts. Accumulated depreciation tallies the depreciation to date of a fixed asset, such as a car or a building. Including contra revenue accounts is important in the income statement because it shows the original amount of sales the firm has made, along with any factor that has reduced that amount. Note that the contra liability account has a positive balance (a debit balance), and the liability account normally has a credit balance.

Advisory services provided by Carbon Collective Investment LLC (“Carbon Collective”), an SEC-registered investment adviser. Contra accounts help provide more accurate financial information by separating certain items and highlighting their impact on the overall financial position. Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock. This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders. Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values. A company receives rebates for advertising it does on behalf of brands it carries in its stores.

Contra accounts act like regular accounts on the balance sheet but have a unique purpose. The purpose of a contra expense account is to record a reduction in an expense without changing the balance in the main account. If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative.

All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Go a level deeper with us and investigate the potential impacts of climate change on investments like your retirement account. For example, if you bought a car for $10,000 seven years ago and you estimated a seven-year life on the vehicle. Now, the car is worth less than $1,000 and you continue to put more money into upkeep, maintenance, and insurance for the car than the value of the vehicle. Osman Ahmed is a member of WSO Editorial Board which helps ensure the accuracy of content across top articles on Wall Street Oasis. Osman started his career as an investment banking analyst at Thomas Weisel Partners…

Contra equity accounts are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds. Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances. 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.

What is a Contra Revenue Account?

For example, if your business has accounts receivable of $50,000 and an allowance for doubtful debts account totalling $5,000, the net accounts receivable is $45,000. In this way, a contra asset (credit) lowers the overall value of your accounts receivables (debit) on the balance sheet. In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000.