Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off. In finance, a contra liability account is one that is debited for the explicit purpose of offsetting a credit to another liability account. In other words, the contra revenue account contra liability account is used to adjust the book value of an asset or liability. 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.

What Is the Benefit of Using a Contra Account?

The balance sheet will show a gross fixed assets value, a contra account value for accumulated depreciation, and a net value. All three values can be useful for investors depending on what they’re looking for. These less-frequent contra accounts come into play when you need to account for changes in the outstanding liabilities for your business.

Contra equity and contra revenue

The contra asset account of your equipment account is the accumulated depreciation of equipment. When the balance in the accumulated depreciation is $10,000 and your equipment account has a debit balance of $50,000, then the book value of your equipment is $40,000. For example, if your business has accounts receivable of $50,000 and an allowance for doubtful debts account totalling $5,000, the net accounts receivable is $45,000.

• The sales discounts contra revenue account records the discounts given to customers on sales made to them, normally a cash or settlement discount.
• All three values can be useful for investors depending on what they’re looking for.
• Consider a business that offers an early payment discount to its customers, cutting their invoiced total by 3% if they pay within 1 week of invoicing.
• Examples of contra expense accounts include Purchase Returns, Purchase Discounts, and Advertising Reimbursements.
• Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance.
• The contra asset account Accumulated Depreciation is deducted from the related Capital Assets to present the net balance on the parent account in a company’s balance sheet.

What is an Accrued Expense Square Business Glossary

Allowance for Doubtful Accounts pairs with the Bad Debts Expense account when doing adjusting journal entries. Whether in-house or outsourced, utilising dedicated accounting and bookkeeping teams ensures accurate recording of contra revenue. Additionally, employing AI-powered accounting software can streamline the process and reduce the likelihood of errors.

• There is almost always a story behind data; a clarification or historical insight that changes the meaning behind raw figures.
• Wanting to spruce up its aging inventory, Show-Fleur purchased new, climate controlled-seats for its fleet, delivering increased comfort for passengers and a cleaner, more modern look for vehicle interiors.
• Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period.
• Recording contra revenue accurately in your accounting books is crucial for maintaining reliable financial records.
• In your income statement, the gross sales of $50,000 are offset by the sales returns and allowances of $1,000.
• 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.

In its general ledger, the business will want to capture its gross sales figures and the actual value of the discount. There is almost always a story behind data; a clarification or historical insight that changes the meaning behind raw figures. In a report, layering on that additional context can be easy, but in a general ledger, you have few options for conveying nuance and subtlety.

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. In a sales returns and allowances contra revenue account, you offset the balance in the sales revenue account. When the contra account reads $500 and the normal credit balance is $100,000, then your net sales are $99,500. This indicates that out of $100,000 sales, your customers return goods valued at $500.

Sales Allowances

• This indicates that out of $100,000 sales, your customers return goods valued at $500.
• Therefore, for these three, the debit balance actually represents a negative amount.
• A business called Show-Fleur offers private driving tours of local botanical gardens — all from the comfort of high-end limousines.
• An estimate of bad debts is made to ensure the balance in the Accounts Receivable account represents the real value of the account.
• The contra asset account of your equipment account is the accumulated depreciation of equipment.
• The account is normally a debit balance and in use is offset against the revenue account which is normally a credit balance.

Most accounts receivable would just be the time between purchase and credit card settlement. If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative. On the other hand, if you’re looking at a high-flying growth stock that reports new revenue growth records each quarter but has a massive allowance for doubtful accounts, there may be problems ahead. Of that amount, it is estimated that 1% of that amount will become bad debt at some point in the future.

Contra liability accounts

It is described as “contra” because having a credit balance in an asset account is contrary to the normal or expected debit balance. (A debit balance in a contra asset account will violate the cost principle.) Learn more about contra asset accounts. The discount on bonds payable amount shows the difference between the amount of cash received when issuing a bond and the value of the bond at maturity. The allowance method of accounting enables a company to determine the amount reasonable to be recorded in the contra account. When recording assets, the difference between the asset’s account balance and the contra account balance is the book value of the asset. Allowance for doubtful accounts is netted from the accounts receivable balance.

• The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment.
• The list of asset accounts on your general ledger and balance sheet conveys the combined, potential value of all of the tangible and intangible items that your organization possesses.
• If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000.
• Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance.
• There can be hidden value in stocks that have a lot of fully depreciated buildings.
• 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.