An example of a contra liability account is the bond discount account, which offsets the bond payable account. A contra liability account is not classified as a liability, since it does not represent a future obligation. 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. A contra asset account is an asset account where the account balance is a credit balance.

Contra Account Example: Allowance for Doubtful Accounts

This general structure can be applied across all contra types, so if the parent account has a credit, the contra account will have a debit. Similarly, if the parent account lists entries as debits, the contra account will appear as a credit. When considering all of the money currently owed to your business that’s recorded in your Accounts Receivable (A/R) line item as an existing asset, there’s a good chance that not all of those customers are going to pay you back in full.

Examples of Contra Accounts

• Given that liabilities have a credit balance, ensure that all your contra liabilities accounts have debit balances.
• Companies bury them in the footnotes and often don’t break out the actual calculation.
• You debit the contra revenue accounts and credit the corresponding revenue accounts.
• 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.
• To illustrate the contra revenue account Sales Returns and Allowances, let’s assume that Company K sells $100,000 of merchandise on credit.

They are useful in preserving the historical value in the main account while presenting a write-down or decrease in a separate contra account that nets to the current book value. You may use accounting software packages, such as QuickBooks Online to set up contra accounts. Simply hit Control + N under the Chart of Accounts or Edit, then click New (to create a new account). The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable.

Contra liability account example

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. Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers. The amount is not reported, and the net sales amount is reported on the income statement. Recording contra revenue accurately in your accounting books is crucial for maintaining reliable financial records. Let’s break down how to do this step-by-step, look at some examples of journal entries, and discuss the best practices for documentation. Make sure you track each type of contra revenue carefully to maintain precise records that can then inform your business decisions and help you spot trends or issues in sales processes, product quality, or pricing strategies.

Contra Account Definition, Types, and Example

It also shows the carrying (net) amount of $19,000, which you report to your firm’s balance sheet. A contra account is a general ledger account that offsets the balance of a corresponding account with which it’s paired. If you debit the contra account, ensure that you offset the related account with a credit balance. In essence, contra accounts allow you to report your firm’s gross and net amounts. These accounts also ensure that you follow the matching principle in accounting, which states that you record expenses in the same period you incur them. If the bond is sold at a discount, the company will record the cash received from the bond sale as “cash”, and will offset the discount in the contra liability account.

While both affect your net income, they do so in different parts of your income statement. Suppose Company A extends a two percent discount on the total amount for payments made within a week, deviating from the standard 30-day term. The company records the discounted portion in its contra account under Sales Discounts in this scenario. The contra revenue account reflects the original amount, the discounted sale, and the resulting net sales for the company. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance.

• 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.
• 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.
• In double entry bookkeeping terms, a contra revenue account or contra sales account refers to an account which is offset against a revenue account.
• For example, when a line item on your balance sheet presents the balance of accounts receivable, report the value of allowance of uncollectible accounts below the accounts receivable line.
• The initial cost of this upgrade was $8 thousand per limo or $600,000 in total.
• The company records the discounted portion in its contra account under Sales Discounts in this scenario.

The sales allowances account contains either an allowance for reductions in the price of a product that has minor defects, or the actual amount of the allowance attributable to specific sales. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. A report in 2023 found that Northern Californians had donated more than Southern California residents, according to an Orange County Register story. Palo Alto ZIP code 94301, known as “Professorville,” ranked second in the analysis and another ZIP code near Stanford University — — placed third, giving 12.9% of their incomes to charity. Contra accounts are confusing at first, but, with a little study, understanding them becomes second nature. Let’s go over how they work and what the main types are, and then finish with an example.

• When a company repurchases shares, it increases the fractional ownership of all remaining shareholders.
• For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
• The purpose of the Accumulated Depreciation account is to track the reduction in the value of the asset while preserving the historical cost of the asset.
• A doubtful debts contra account allows for future write-offs of accounts receivable.
• Including contra accounts on a balance sheet is important as it allows for a more transparent view of a company’s financial position.
• Still, it is important when possible to consider how the net accounts are calculated and be wary of companies that are reporting a ton of bad debts.

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. In case a customer returns a product, the company will record the financial activity under the sales return account. The use of contra accounts ensures the accuracy of financial accounting records, as the value of the original accounts is not directly reduced. In the event that a contra account is not utilized, it can become increasingly troublesome to determine historical costs, which makes tax preparation time-consuming and difficult. The balance in the allowance for doubtful accounts is used to find out the dollar value of the current accounts receivable balance that is deemed uncollectible.

• With the appropriate level of automation integration in your chosen tool, you can pull the relevant values into these individual accounts directly from invoices, credit agreements, and other documentation.
• When considering all of the money currently owed to your business that’s recorded in your Accounts Receivable (A/R) line item as an existing asset, there’s a good chance that not all of those customers are going to pay you back in full.
• If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming.
• Contra account is important as it not only allows a company to report the original amount of a transaction but also report any reductions that may have happened so that the net amount will also be reported.
• To manage contra revenue effectively, focus on strategies that minimize these occurrences and enhance profitability.