By viewing these accounts — the parent and contra — in tandem, business owners can gain broader insights, preserve the historical figures stored in the parent account, and make accommodations for any relevant changes. It’s normal for businesses to receive refund requests or returns from customers. Accruing tax liabilities in accounting involves recognizing and recording taxes that a company owes but has not yet paid.

Contra Revenue: Simplifying Returns, Discounts, And Allowances

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. All three values can be useful for investors depending on what what is a contra account they’re looking for. A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet. Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt. The contra liability account is less common than the contra asset account.

What is a Contra Account? Definition

However, some asset accounts need a negative counterpart to reduce the balance of that account. The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. Revenue is an income statement account, but it flows through to the equity section of retained earnings as well. 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.

Time Value of Money

• For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
• However, some asset accounts need a negative counterpart to reduce the balance of that account.
• This indicates that out of $100,000 sales, your customers return goods valued at $500.
• Typically, these notes reflect purchases made on credit by your customers.
• If you debit the contra account, ensure that you offset the related account with a credit balance.

Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. A contra revenue represents any deductions or offsets that need to be removed from gross revenue to provide a clearer understanding of actual income  —  such as in the example just provided.

• 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).
• Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers.
• In your financial statements, contra revenue accounts appear as deductions from gross sales to arrive at net sales.
• Obsolete, Unsold and Unusable Inventory are contra asset accounts with a credit balance that reduce the normal debit balance of the main Inventory asset account in order to present the net value of inventory on a company’s balance sheet.
• The revenue contra accounts Sales Returns, Discounts and Allowances are subtracted from the main Sales Revenue account to present the net balance on a company’s income statement.

The company predicts which accounts receivable won’t be paid by customers and writes those off. When the account receivable is written off, it is added to bad debt expense on the income statement and placed in the contra account. If a company has a high or fast-growing allowance as a percentage of accounts receivable, keep a close eye on it. Accounts receivable is rarely reported on the balance sheet at its net amount.

• A contra asset is paired with an asset account to reduce the value of the account without changing the historical value of the asset.
• Accumulated depreciation is the total of all depreciation that has been charged to existing fixed assets such as equipment and buildings.
• The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible.
• Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset.
• A doubtful debts contra account allows for future write-offs of accounts receivable.
• Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period.

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. As mentioned, contra asset accounts usually have a negative value which is the same as a credit balance. That is to completely or partially offset the balance of their related asset accounts. Asset accounts usually have a positive value which is the same as a debit balance. Allowance for doubtful accounts is netted from the accounts receivable balance.

Taking a closer look at contra asset accounts

• The most common contra account is the accumulated depreciation account, which offsets the fixed asset account.
• But in the real world, converting all of that potential into hard cash is highly unlikely, if not impossible.
• These contra revenue accounts tend to have a debit balance and are used to calculate net sales.
• The monthly accounting close process for a nonprofit organization involves a series of steps to ensure accurate and up-to-date financial records.
• Accumulated depreciation reflects the reduction in value of a fixed asset.

Contra equity and contra revenue