What is a Contra Expense Account?

For example, Santa Clara County is working to expand its interim housing efforts that include units ranging from 40 to 150 square feet, which are lock and key and service-enriched with meals, health care and employment assistance. Permanent housing is the ultimate solution to ending homelessness, but it takes a long time to build and is costly, with average per-unit expenses exceeding $600,000 and exceeding $1.1 million in some major cities. While we must keep constructing and investing in sufficient permanent housing long-term, we must still address the short-term crisis with uniquely Californian solutions. The auditors aim to keep the balances at their adequate levels, but the controller might want to keep them as low as possible to reduce expenses and maximize profit levels. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more.

The Contra Revenue Account

Contra asset accounts can be used in a variety of areas, but there are three contra asset examples that you should pay close attention to. Asset accounts always maintain a debit balance, so anytime that you increase the value of an asset, such as when you deposit customer payments or invoice a customer, that asset account is debited or increased. Likewise, when you pay a bill, your cash account is reduced (credited) because you’re lowering the balance.

Contra revenue definition

  1. If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts.
  2. You’ve just converted $20 worth of cash into $20 worth of shoes; an asset that remains in your inventory.
  3. Purchase returns, allowances and discounts are all examples of contra expense accounts.
  4. For example, Santa Clara County is working to expand its interim housing efforts that include units ranging from 40 to 150 square feet, which are lock and key and service-enriched with meals, health care and employment assistance.

Expenses are the costs of doing business, but not all costs are expenses. In accounting terms, an expense is a cost incurred to produce revenue reported on the income statement. If you buy a pair of shoes from your supplier for $20, that’s a cost, but it’s not yet an expense. That’s because, as far as accounting is concerned, bank overdraft in balance sheet you haven’t really “spent” $20. You’ve just converted $20 worth of cash into $20 worth of shoes; an asset that remains in your inventory. Since you no longer have the shoes, aka the asset, you record a $20 expense on your income statement, But you also record $30 in revenue from the sale, so your net income is $10.

Contra Entry Journal

Discount on Bonds Payable is a contra liability account with a debit balance that reduces the normal credit balance of its parent Bonds Payable liability account in order to present the net value of payables on a company’s balance sheet. By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company. For example, if a company just reported equipment at its net amount, users would not be able to observe the purchase price, the amount of depreciation attributed to that equipment, and the remaining useful life. Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset. To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts. Since it is a contra asset account, this allowance account must have a credit balance (which is contrary to the debit balances found in asset accounts).

List of Contra Accounts

For example, this analysis might indicate that your business has product quality problems or servicing issues that can be corrected. In addition, you can examine the impact of sales discounts on increases in sales, to see if it makes sense to continue offering discounts in order to boost profits. To oppose the revenue made by a company, contra revenue accounts must have a debit balance. Both the asset and the corresponding contra asset accounts must be stated clearly in the balance sheet.

In either case, using these accounts can help you better manage depreciation expense, keep your accounts receivable balance accurate, and properly dispose of and account for obsolete inventory. Contra asset accounts provide business owners with the true value of certain asset accounts. For example, let’s say your accounts receivable balance is currently $11,500, but you’re not entirely sure that you’ll be able to collect the entire balance due. The purpose of a contra expense account is to record a reduction in an expense without changing the balance in the main account. Of that amount, it is estimated that 1% of that amount will become bad debt at some point in the future. This means that the $85,000 balance is overstated compared to its real value.

Allowance for doubtful accounts

Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense. As mentioned, contra asset accounts are usually listed below their matching asset accounts, and the net values of those assets are written next to the contra accounts. Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance.

In other words, contra revenue is a deduction from gross revenue, which results in net revenue. This account serves two purposes — tracking total depreciation expenses while providing you with the accurate book value of the asset being depreciated. When the company pays the cost of having the flyer printed, a journal entry is done. The purpose of the Owner’s Withdrawal account is to track the amounts taken out of the business without impacting the balance of the original equity account. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.

Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements. Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. 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. Purchase returns, allowances and discounts are all examples of contra expense accounts. The accounts normally have a credit balance and in use are offset against the purchases account which is normally a debit balance.

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. Anytime you need to depreciate an asset, you’ll use an accumulated depreciation contra asset account, which records the amount of depreciation that has been expensed while offsetting the value of the asset https://accounting-services.net/ being depreciated. By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount. 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.

The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold. 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 $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately. For example, when depreciating an asset, the accumulated depreciation account is used to reduce the book value of the asset while also keeping track of the total amount of depreciation that has been posted to date. Accruing tax liabilities in accounting involves recognizing and recording taxes that a company owes but has not yet paid.

The net effect of the contra entry journal is that the balance on the accounts payable ledger is cleared and a balance of 800 remains on the accounts receivable ledger, representing the net amount outstanding from the customer. Occasionally a business has cause to offset an amount owed by a customer (accounts receivable) with an amount owed to a supplier (accounts payable). 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. For example, an asset was purchased by a company for $100,000 – that is, the historical cost of the asset was $100,000 – and its contra asset counterpart has a balance of $30,000. You’ll continue to use the contra asset account until the equipment has been completely depreciated, retired, or sold.

The contra asset account, accumulated depreciation, is always a credit balance. This balance is used to offset the value of the asset being depreciated, so as of September 1, your $8,000 asset now has a book value of $7,866.67. If you offer credit terms to your customers, you probably know that not all of them will pay. Creating this contra asset account builds in a safeguard against overstating your accounts receivable balance. 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.

Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost. Although they all aim at reducing the balance of some type of account, it is useful to have some general foundational knowledge of the different types of accounts. 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. GAAP, the allowance for doubtful accounts represents management’s estimate of the percentage of “uncollectible” accounts receivable (i.e. the credit purchases from customers that are not expected to be paid). Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available.

When the two balances are offset against each other they show the net balance of both accounts. Each unit costs as little as $50,000 to build, reducing the per-person costs of treating homelessness. Additionally, every time someone achieves independence and moves out of interim housing, a new space frees up to help another person experiencing homelessness. Seattle’s comparable project saw 65% of users move to permanent housing within six months. The interim housing model is a proven local strategy that has repeatedly been shown to reduce unsheltered homelessness.

Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt. In response, the firm should decrease its accounts receivable and revenue balances. That is done by crediting accounts receivable by $100 and debiting the contra revenue account sales returns and allowances for $100.

The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment. The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation.

This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders. Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at Scale Venture Partners, focused on technology. He’s currently a VP at KCK Group, the private equity arm of a middle eastern family office. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions.

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