Although the car is normally an asset because you can sell it for parts or use it for your business, when the car depreciates to a zero or negative balance, it is a contra asset on your balance sheet. Revenue is shown on the income statement as a credit, it is the amount of revenue a business earns in a period. It might be important for a business to track the full cost of sales less contras to see the full picture. By understanding the nature and function of contra accounts, businesses can accurately https://intuit-payroll.org/ reflect their financial position, providing transparency to stakeholders such as investors, creditors, and internal management. At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset. For example, if the balance of accumulated depreciation increases from $20,000 to $50,000, this means that the depreciation expense amounts to $30,000, which will be listed in the income statement.

For industries that rely on natural resources — mining, logging, oil, gas — depletion tracks the gradual exhaustion of the raw material in question, offsetting that loss in value against the initial appraisal of the land. So an Accumulated Depletion account would serve as the contra for the parent Fixed Asset account. In other words, contra revenue is a deduction from gross revenue, which results in net revenue.

This account helps to give a more accurate picture of the company’s financial position. This article will give you the definition of contra in accounting, talk about different contra accounts, and give examples. Whenever the balance of an account needs to be reduced in a company’s ledger, it is not always applicable to credit the account if it is an asset or debit the account if it is a liability.

• This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders.
• As mentioned, contra asset accounts usually have a negative value which is the same as a credit balance.
• The purpose of a contra expense account is to record a reduction in an expense without changing the balance in the main account.

Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra revenue accounts reduce revenue accounts and have a debit balance. Given that liabilities have a credit balance, ensure that all your contra liabilities accounts have debit balances.

Contra Revenue Account Example

If the related account has a debit as the natural balance, then the contra account will record a credit. Make sure that you report contra accounts on the same financial statement as the related accounts. If you’re the one managing your company’s books of accounts, be sure to report the contra account on your financial statement on the line item directly beneath the main account.

• When the amount recorded in the contra revenue accounts is subtracted from the amount of gross revenue, it equals the net revenue of a company.
• This would let users of the financial statements calculate the book value of the liability.
• Similarly, accrued liabilities reduce the total amount of current liabilities.
• Simply hit Control + N under the Chart of Accounts or Edit, then click New (to create a new account).

By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes. For example, if a piece of heavy machinery is purchased for $10,000, that https://www.wave-accounting.net/ $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately. 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).

What is a Contra Liability?

The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. The amount is reported on the balance sheet in the asset section immediately below accounts receivable. If the amount in a contra liability account is immaterial, it could reasonably be combined into a single balance sheet line item with the liability that it is intended to offset.

Contra Account Examples

The first contra liability listed is an original issue discount (OID), a feature of debt financing wherein the issuance price is less than the redemption price. A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. When a company gives a discount to customers in an effort to convince them to buy its goods or services, it is recorded in the discount on sales account.

Contra Liability Account

Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts. This helps the firms to evaluate the book value of their assets and liabilities. The Allowance for Doubtful Accounts is used to track the estimated bad debts a company my incur without impacting the balance in its related account, Accounts Receivable. An estimate of bad debts is made to ensure the balance in the Accounts Receivable account represents the real value of the account. Allowance for Doubtful Accounts pairs with the Bad Debts Expense account when doing adjusting journal entries.

What is a Contra Equity Account?

ABC Computers makes sales of 90,000; unfortunately, due to a fault in a product, they received returns of 2,500. The sales will still show a sales credit on the profit and loss of 90,000, but there is also a contra returns account with a debit of 2,500. A contra account is a general ledger used to reduce the value of a related account.

They are usually subcategory accounts linked to an account on the balance sheet. Contra accounts are used to offset each other and reduce the gross amount. For example, a contra accumulated depreciation account can offset a fixed asset. In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000.

A contra expense account is an account used to reduce the amount of an expense without changing the balance in the main expense account. Examples of contra expense accounts include Purchase Returns, Purchase Discounts, and Advertising Reimbursements. A contra account https://personal-accounting.org/ provides missing context by pairing it with a related account. So as values shift depending on real-world factors, rather than making deductions or adjustments to the original or “parent” account, you would record these changes in the contra account instead.