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. Pilot is a provider Role of Financial Management in Law Firm Success of back-office services, including bookkeeping, controller services, and CFO services. Pilot is not a public accounting firm and does not provide services that would require a license to practice public accountancy.
Now, if that sounded like a lot of mumbo-jumbo jargon to you, don’t worry. In this article, we’re going on a deep dive into what exactly a contra account is, how contra accounts work, why and how you would use contra accounts and more. This account prevents your business from unpredictable losses and keeps your bookkeeping records accurate. It also allows you to gauge the impact of your business activities on the net revenue and total profit.
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Companies like to depreciate assets as quickly as possible to get the tax savings, so the balance sheet may not state the true value of fixed assets. A contra account is an entry on the general ledger with a balance https://1investing.in/accounting-financial-planning-services-for/ contrary to the normal balance for that categorization (i.e. asset, liability, or equity). The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.
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. An allowance for doubtful accounts is a contra asset account that is used to offset Accounts Receivable on the balance sheet.
When the company pays the cost of having the flyer printed, a journal entry is done. We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R). A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. A ‘contra’ does not reduce the ‘payment’ from which the deduction may have to be made. It is in effect a ‘payment’ by the contractor to the subcontractor.
For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. If your company has minimal contra revenue activity, it is acceptable to record these transactions within the revenue account. The sales returns account contains either an allowance for returned goods, or the actual amount of revenue deduction attributable to returned goods.
Contra Account Examples
If the related account is a liability account, then a contra liability account is used to offset it with a debit balance. Thus, the natural balance of a contra account is always the opposite of the account with which it is paired. The most common contra account is the accumulated depreciation account, which offsets the fixed asset account.
Taken together, the asset account and contra asset account reveal the net amount of fixed assets still remaining. A contra asset account is not classified as an asset, since it does not represent long-term value, nor is it classified as a liability, since it does not represent a future obligation. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Accumulated depreciation reflects the reduction in value of a fixed asset. The sales discounts account records the discounts given to customers on sales made to them, normally a cash or settlement discount.
What is a Contra Revenue Account?
There is almost always a story behind data; a clarification or historical insight 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. But sometimes, dissimilar transactions are important to consider together within a ledger. An example of contra equity with buying back shares or stock would be a company that has issued shares to the public.