Contra Account Definition + Journal Entry Examples

Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement. Contra revenue accounts typically offset revenue accounts in a firm’s income statement. As mentioned, businesses use contra revenue accounts to understand net vs. gross revenue. The transactions are sometimes recorded in one or more accounts, but the balance is usually a debit. To determine the contra revenue, you simply deduct the gross sales from the net sales. Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value.

How to Calculate Straight Line Depreciation

We’ll need to dig into the footnotes to find out what the contra accounts are. 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. These deductions, which come in the form of sales returns, allowances, and discounts, are not expenses but adjustments that lower the total sales on your income statement. Generally in the financial statements the revenue account would be offset against the contra revenue account to show the net balance. Nor would it count as a liability as it does not reflect a future obligation.

Do Contra Accounts Have Debit or Credit Balances?

The hottest retail item of today can be relegated to nostalgia channels on YouTube tomorrow. And when your business still has some of these outdated, unwanted, or unusable items in your inventory, you’ll want to offset the lost value of these assets in your general ledger and balance sheet. So rather than adjusting your Inventory account, you would update its contra account — Obsolete Inventory. In its general ledger, the business will want to capture its gross sales figures and the actual value of the discount.

Contra asset accounts journal entries

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. Contra accounts act like regular accounts on the balance sheet but have a unique purpose. A contra expense account is an account used to reduce the amount of an expense without changing the balance in the main expense account.

Contra Revenue Sales Discount Illustration

Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities includes discounts on notes or bonds payable. 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. Contra revenue is a deduction from the gross revenue reported by a business, which results in net revenue.

Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. In other words, accumulated depreciation will be $10,000 each year until the car depreciates to $0 twenty years later. Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock. The main reason is to make the remaining shares more valuable, as their prices are expected to rise after the stock buyback. This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders. You would debit $50,000 as Accounts Receivable and credit $50,000 as Sales.

Contra Asset Accounting & Examples

Treasure stock is a good example as it carries a debit balance and decreases the overall stockholders’ equity. 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. In other words, contra accounts are used to reduce normal accounts on the balance sheet. 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.

• Similarly, if the parent account lists entries as debits, the contra account will appear as a credit.
• This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms.
• Revenue is an income statement account, but it flows through to the equity section of retained earnings as well.
• Make sure that you report contra accounts on the same financial statement as the related accounts.
• The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet.

It also shows the carrying (net) amount of $19,000, which you report to your firm’s balance sheet. If a company sells a bond at a discount, the difference between the cash received and the value of the bond it sold will be listed as “discount on bonds payable,” which is a contra liability account, the counterpart of bonds payable. If Company A offers a two percent discount on the total amount if paid within a week instead of the usual 30 days, the company records the discounted amount in its contra account as Sales Discounts. The company would see the original amount, discounted sale, and net sales in the contra revenue account. Expenses are the costs of operating your business, like rent, salaries, and utilities. Contra revenue, on the other hand, directly reduces the sales figures reported on your financial statements.

• There are three commonly used contra revenue accounts, which are noted below.
• Are you looking for a way to account for accumulated depreciation, returned merchandise, or damaged inventory?
• When a company repurchases shares, it increases the fractional ownership of all remaining shareholders.
• If your client returns $1000 of the products bought, you record Sales Returns and Allowances worth $1,000 as debit and credit $1000 as Accounts Receivable.
• At the same time, our Accounts Receivable Automation software and Accounts Payable Automation software makes tracking, managing, and processing crucial assets and liabilities — and their contras — easier than ever before.
• Also, optimize your discount strategies by offering them selectively based on customer segment or purchase behavior.

These contra revenue accounts tend to have a debit balance and are used to calculate net sales. 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 what is a contra account returns and allowances for $100. Hence, the company will have gross revenue or net sales equal to $9,900. Contra liability accounts are less commonly used than contra asset accounts. Contra liability accounts are mainly used by corporations that issue bonds frequently.

For example, you might offer bulk purchase discounts to large buyers but limit early payment discounts to customers who have shown reliability in the past. This guide is also related to our articles on understanding gross vs. net profit, understanding prepaid expenses, and understanding unearned revenue. A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. — Texas Tech generated the highest annual revenue growth over the five-year span, 9.9 percent, but also had the highest annual expense growth, 9.4 percent. 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.