How to Use Contra Asset Accounts
Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. If you keep a lot of inventory in stock, chances are that some of the inventory will become obsolete. This frequently happens to manufacturing companies that sell products with an expiration date since any inventory remaining in stock past the expiration date quickly becomes obsolete. The counties of Marin, San Mateo, Santa Clara and Contra Costa consecutively topped the charts by taking up the first four spots, according to the ranking from financial technology company SmartAsset.
Balance Sheet
In your income statement, the gross sales of $50,000 are offset by the sales returns and allowances of $1,000. Contra revenue accounts appear near the top of the income statement, as a deduction from gross revenue. If the amounts of these line items are minimal, they may be aggregated for reporting purposes into a single contra revenue line item. As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find. Companies bury them in the footnotes and often don’t break out the actual calculation. Still, it is important when possible to consider how the net accounts are calculated and be wary of companies that are reporting a ton of bad debts.
Example of Contra Expense Account
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. The account offsets the balance in the respective asset account that it is paired with on the balance sheet. Contra Equity Account – A contra equity account has a debit balance and decreases a standard equity account. Treasure stock is a good example as it carries a debit balance and decreases the overall stockholders’ equity. A contra account is an account with a balance opposite the normal accounts in its category.
- You can estimate the total to record in the allowance for doubtful accounts based on uncollectible revenue totals from the previous year or you can conservatively estimate the amount.
- If contra assets appear in the credit column, record contra liabilities on side.
- The company predicts which accounts receivable won’t be paid by customers and writes those off.
- 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.
- For the purpose of presentation on primary financial statements, we are often concerned only with the net figure of two similar classes/balances which we determine by subtracting one account from the another.
- Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a creditbalance.
Example of Contra Revenue in Sales Discounts
Contra asset accounts provide business owners with the true value of certain asset accounts. For example, let’s say your accounts receivable balance is currently $11,500, but you’re not entirely sure that you’ll be able to collect the entire balance due. Contra expense accounts are rarely used, because organizations find it to be easier to record third-party payments directly against an expense account. However, these accounts are still useful when dealing with large quantities of reimbursements, where it is cleaner and less confusing to store the information in a separate account. Thus, the use of a separate contra expense account makes it easier to monitor the flow of expenses and reimbursements.
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Take your learning and productivity to the next level with our Premium Templates. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. Contra accounts are confusing at first, but, with a little study, understanding them becomes second nature. Let’s go over how they work and what the main types are, and then finish with an example. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
Advantages of Contra Revenue
The credit balance in the liability account Bonds Payable minus the debit balances in the contra-liability accounts Discount on Bonds Payable and Bond Issue Costs results in the carrying value or book value of the bonds. The credit balance in Notes Payable minus the debit balances in Discount on Notes Payable is the carrying value or book value of the notes payable. The difference between the gross balance of a main account and its contra accounts reported contra revenue account as the net balance in a company’s financial statements is also referred to as a book value, current value, carrying value, or net realizable value. Sales returns, sales allowance and sale discounts are different examples of contra revenue accounts. Contra accounts such as these have a debit balance and are deducted from the total amount of a company’s revenue. Examples of revenue contra accounts are Sales Discounts, Returns and Allowances.
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). 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. The allowance method of accounting enables a company to determine the amount reasonable to be recorded in the contra account. When recording assets, the difference between the asset’s account balance and the contra account balance is the book value of the asset. Accounts receivable is rarely reported on the balance sheet at its net amount. Instead, it is reported at its full amount with an allowance for bad debts listed below it.
- However, that $1.4 billion is used to reduce the balance of gross accounts receivable.
- Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off.
- The difference between an asset’s balance and the contra account asset balance is the book value.
- Similarly, accumulated depreciation accounts reduce the value of the fixed assets you report on your financial statements.
- Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory.
In double entry bookkeeping terms, a contra revenue account or contra sales account refers to an account which is offset against a revenue account. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete. Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods. In this scenario, a write-down is recorded to the reserve for obsolete inventory.