These accounts will typically help track sales discounts, product returns, and allowances (e.g., a price reduction for a good with minor defects). Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance. For instance, if a company has a plant asset such as Equipment with a debit balance of $92,000 and the account Accumulated Depreciation has a credit balance of $50,000, the carrying amount (or book value) of the equipment is $42,000. Businesses leverage contra-revenue accounts to distinguish between net and gross revenue. While transactions may be recorded in one or more arrangements, the typical balance is a debit, contrasting with the usual credit balance in a standard sales account. Calculating contra revenue involves a straightforward deduction of gross sales from net sales.
Taking a closer look at contra asset accounts
In your financial statements, contra revenue accounts appear as deductions from gross sales to arrive at net sales. If your business makes $100,000 in gross sales, say, and has $5,000 in total contra revenues from returns, allowances, and discounts, your net sales would be reported as $95,000. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. These contra revenue accounts tend to have a debit balance and are used to calculate net sales. The sales discounts contra revenue account records the discounts given to customers on sales made to them, normally a cash or settlement discount. The account is normally a debit balance and in use is offset against the revenue account which is normally a credit balance.
Cash Flow Statement
To put it another way, a contra account is an account listed within a general ledger with the purpose of capturing the reduced value of a paired or related account when the two are added together. Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement. 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. However, that $1.4 billion is used to reduce the balance of gross accounts receivable. Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount.
Why should one include contra accounts on a balance sheet?
- When the company pays the cost of having the flyer printed, a journal entry is done.
- Each year of an asset’s life, another year of Depreciation Expense is recorded.
- Of that amount, it is estimated that 1% of that amount will become bad debt at some point in the future.
- When the balance in the accumulated depreciation is $10,000 and your equipment account has a debit balance of $50,000, then the book value of your equipment is $40,000.
For example, a building is acquired for $20,000, that $20,000 is recorded on the general ledger while the depreciation of the building is recorded separately. Get instant access to video lessons taught by experienced investment bankers. 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.” Accruing tax liabilities in accounting involves recognizing and recording taxes that a company owes but has not yet paid.
Understanding Contra Liability Accounts
Sales returns occur when a customer returns a product they previously purchased, a common occurrence in retail and e-commerce. As a business owner, you’ll record these returns as contra revenue because they reduce the initial sales amount reported. In your income statement, the gross sales of $50,000 are offset by the sales returns and allowances of $1,000. For example, accumulated depreciation is a contra asset that contra revenue account reduces the value of a company’s fixed assets, resulting in net assets. You can also record contra revenue within the sales account, but this means that it will be buried within the total amount of revenue reported, so that management cannot easily determine the amount of contra revenue. If your company has minimal contra revenue activity, it is acceptable to record these transactions within the revenue account.
The Contra Asset Account
- While both affect your net income, they do so in different parts of your income statement.
- This discount is subtracted from the total amount borrowed to better reflect the discount given by the lender.
- Across the state of California, charitable contributions made up around 1.23% of people’s income; only 9.28% of income tax returns itemized charitable contributions.
- A contra account is a general ledger account with a balance that is the opposite of another, related account that it is paired with.
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- If your company has minimal contra revenue activity, it is acceptable to record these transactions within the revenue account.
- A delivery van is purchased by a business to use in delivering product and picking up materials.