It can help businesses see the complete picture of their income and expenses. 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.
The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline. 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). Revenue is shown on the income statement as a credit, it is the amount of revenue a business earns in a period.
Contra Account Definition, Types, and Example
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. The contra asset account Accumulated Depreciation is deducted from the related Capital Assets to present the net balance on the parent account in a company’s balance sheet. If a company offers an early payment discount (such as 1% or 2% of the invoice amount if it is paid within 10 days instead of the required 30 days) the amount of the discount is recorded in the contra revenue account Sales Discounts. Again, the company’s management will see the original amount of sales, the sales discounts, and the resulting net sales. Generally in the financial statements the revenue account would be offset against the contra revenue account to show the net balance.
- Accumulated depreciation reflects the reduction in value of a fixed asset.
- When the original dollar amount is kept in the original account and a separate account is used for recording the deduction, the resulting financial information becomes more transparent and helpful for stakeholders.
- Examples of contra expense accounts include Purchase Returns, Purchase Discounts, and Advertising Reimbursements.
- In this scenario, a write-down is recorded to the reserve for obsolete inventory.
- I strongly suggest having a trained Accountant do this (or something in a similar vein) if you need it done for your business.
- The assets are always shown on the left-hand side, and the liabilities are always displayed on the right-hand side.
A contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as contra asset accounts. https://simple-accounting.org/quicken-for-nonprofits-personal-finance-software/ It is not classified as a liability since it does not represent a future obligation. Contra revenue is a deduction from the gross revenue reported by a business, which results in net revenue.
Sales Allowances
The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. 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.
Therefore, a contra asset can be regarded as a negative asset account. Offsetting the asset account with its respective contra asset account shows the net balance of that asset. The revenue contra accounts Sales Returns, Affordable Startup Bookkeeping and Accounting Pricing Discounts and Allowances are subtracted from the main Sales Revenue account to present the net balance on a company’s income statement. The company would then have a contra liability account for the bonds.
Reasons To Outsource Bookkeeping Services for Small Business
In other words, its expected balance is contrary to—or opposite of—the usual credit balance in a revenue account. In double entry bookkeeping terms, a contra revenue account or contra sales account refers to an account which is offset against a revenue account. 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.
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- The accounts normally have a credit balance and in use are offset against the purchases account which is normally a debit balance.
- Although you have not officially written off these debts yet, you show them to be a negative balance because you don’t believe the customer will pay you.
- For example, when a line item on your balance sheet presents the balance of accounts receivable, report the value of allowance of uncollectible accounts below the accounts receivable line.
- 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.
