Contra Account: Definition, Types & Examples

The difference between an asset’s balance and the contra account asset balance is the book value. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. A debit will be made to the bad debt expense for $4,000 to balance the journal entry. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month.

Contra revenue accounts have a debit balance, which is the opposite of the typical credit balance found in revenue accounts. The purpose of a contra revenue account is to reduce the total revenue shown on the income statement by reflecting specific adjustments, allowances, or returns related to the revenue. By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company. For invoice format tips for beginners 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. Examples of a contra revenue accounts include sales returns, sales discounts, and sales allowances.

Examples of Contra Revenue Accounts

The following are examples of commonly-used contra asset accounts you could create to better understand your business financials. However, it’s important to keep in mind that you can create any contra account you want to more clearly describe your business — this is not an exhaustive or definitive list. A contra revenue represents any deductions or offsets that need to be removed from gross revenue to provide a clearer understanding of actual income  —  such as in the example just provided. These accounts will typically help track sales discounts, product returns, and allowances (e.g., a price reduction for a good with minor defects). 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.

  • You can use contra accounts to record the goods your customers return, inventory that gets damaged, and equipment depreciation.
  • Fortunately, the seat vendor offered an early payment discount of 5%, meaning that when Show-Fleur paid off its full credit note within the first 30 days, it recouped $30 thousand in savings.
  • Likewise, drawing means to withdraw money from the business for personal use.
  • Either it is asset, liability, or equity what the account do is to have an opposite balance.

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. At this point, it isn’t known which accounts will become uncollectible so the Accounts Receivable balance isn’t adjusted. Instead, an adjusting journal entry is done to record the estimated amount of bad debt. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.

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The account offsets the balance in the respective asset account that it is paired with on the balance sheet. Contra Equity Account – A contra equity account has a debit balance and decreases a standard equity account. Treasure stock is a good example as it carries a debit balance and decreases the overall stockholders’ equity. The Notes Receivable account documents the total value of any promissory notes held by the company. To obtain a cash payout before the note reaches maturity, you can sell these notes to a bank or other financial institution for some price below the note’s face value. Contra revenue account sales returns are very convenient in showing the results on the net revenue of refunds and returns.

Sales Discounts Account

A business called Show-Fleur offers private driving tours of local botanical gardens — all from the comfort of high-end limousines. For its day-to-day operations, the business maintains a fleet of 75 identical 2016 Ford Explorer limousines, each initially retailing at $150 thousand. However, these vehicles have experienced significant wear and tear in the intervening years. And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Our team of reviewers are established professionals with years of experience in areas of personal finance and climate.

A key example of contra liabilities includes discounts on notes or bonds payable. You may want to first classify contra accounts as contra asset accounts, contra liability accounts, contra equity accounts, or contra revenue accounts before accounting for any transaction. Examples of revenue contra accounts are Sales Discounts, Returns and Allowances.

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Because contra asset accounts are used so frequently, it’s worth spending a little bit more time on them here, including common subtypes. A contra asset is paired with an asset account to reduce the value of the account without changing the historical value of the asset. Examples of contra assets include Accumulated Depreciation and Allowance for Doubtful Accounts. Unlike an asset which has a normal debit balance, a contra asset has a normal credit balance because it works opposite of the main account. Examples include accumulated depreciation, sales returns and allowances, and contra equity accounts like treasury stock.

These deductions are a common part of doing business, especially if you are trying to retain customers by offering them discounts from the list prices of your goods and services. Contra revenue transactions are recorded in one or more contra revenue accounts, which usually have a debit balance (as opposed to the credit balance in the typical revenue account). There are three commonly used contra revenue accounts, which are noted below. For a clearer understanding of contra revenue account sales allowances and returns, I’m going to explain it by using an illustration. Let us assume that Zawarudo Company sells $100,000 worth of commodities on credit.

And finally, contra revenue accounts, like sales discounts and allowances, reduce gross revenue to arrive at net revenue. When it comes to recording contra accounts, there are different methods that can be used. For example, when dealing with contra asset accounts, such as accumulated depreciation, the offset is made to an expense account. This allows businesses to accurately reflect the decrease in value of the asset.

Therefore, to ensure accounts receivable stays clean and transparent, CCC will record $2,500 in the contra asset account called “Allowance for Doubtful Accounts”. This will ensure the net value of accounts receivable at year-end is not overstated. As a reminder, assets and expenses are debit accounts whereas liabilities and revenues are credit accounts. One other type of account is the contra account and for accountants, this is a must-know. Each type of contra account has its specific purpose in financial reporting, helping to present a more accurate and detailed picture of a company’s financial position. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers.