What is a Contra Account?

The benefit of using the contra expense account is that the company’s managers can see in account 4210 the total amount that the company paid to the health insurance company. Then in account 4211 they can see the portion of the cost that was paid by the employees. The company’s income statement will report the combination of the amounts https://accounting-services.net/delivery-expense/ in accounts 4210 and 4211 in order to show the company’s actual expense of $8,000 ($10,000 minus $2,000). Therefore, a contra expense account that contains a debit balance must have a negative ending balance. Definition of Contra Asset Account A contra asset account is an asset account where the account balance is a credit balance.

• Contra liability, equity, and revenue accounts have natural debit balances.
• Definition of Contra Asset Account A contra asset account is an asset account where the account balance is a credit balance.
• The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.
• A contra liability account is not classified as a liability, since it does not represent a future obligation.
• Of course, you’ll also have to pay your employees’ wages, your rent, your utilities and other costs.

Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical costs, what is a contra expense which can make tax preparation more difficult and time-consuming. In accounting, refunds are handled through a contra-revenue account known as the sales returns and allowances account, reports Accounting Coach.

What Are the Different Types of Contra Accounts?

Accumulated depreciation reflects the reduction in value of a fixed asset. The contra revenue accounts commonly used in small-business accounting include sales returns, sales allowance and sale discounts. A contra revenue account carries a debit balance and reduces the total amount of a company’s revenue. A liability that is recorded as a debit balance is used to decrease the balance of a liability. It is not classified as a liability since it does not represent a future obligation.

• Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock.
• 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.
• The purpose of the Sales Returns account is to track the reduction in the value of the revenue while preserving the original amount of sales revenue.
• Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset.
• Allowance for uncollectible accounts, or allowance for doubtful accounts, is one of the most common contra current asset accounts.

Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. The cost of goods sold (COGS) account will have a debit balance of $100,000, representing the initial cost of the inventory. The purchase discounts account will have a credit balance of $2,000 (2% of $100,000), which represents the discount received from the supplier. The debit balances in the above accounts are amortized or allocated to an expense, such as Interest Expense over the life of the bonds or notes payable.

Double Entry Bookkeeping

For example net sales is gross sales minus the sales returns, the sales allowances, and the sales discounts. The net realizable value of the accounts receivable is the accounts receivable minus the allowance for doubtful accounts. The most common contra account is the accumulated depreciation account, which offsets the fixed asset account.

An example of this is when a company pays for medical insurance for its employees and records it as an employee benefits expense. The reimbursements from employees are recorded in a benefits contra expense account, which results in a reduced total benefits expense for the company. Home Depot reports net receivables and net property and equipment, implying that both are reduced by contra assets. We’ll need to dig into the footnotes to find out what the contra accounts are. Contra equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock.

Contra Revenue Account

Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock. A delivery van is purchased by a business to use in delivering product and picking up materials. The company uses Straight-Line Depreciation to track the loss of value of the asset over time. 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. 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. Contra revenue is a deduction from the gross revenue reported by a business, which results in net revenue.

• You’ve just converted $20 worth of cash into $20 worth of shoes; an asset that remains in your inventory.
• The national brand gives the grocery store cash, reducing the overall cost of printing the flyer.
• Once a doubtful debt becomes uncollectable, the amount will be written off.
• For instance, the company might debit its expense account 4210 Employee Health Insurance Expense when recording the insurance company’s invoice of $10,000.

For instance, the company might debit its expense account 4210 Employee Health Insurance Expense when recording the insurance company’s invoice of $10,000. If the company withholds $2,000 from its employees’ wages to pay part of the cost of the insurance, the company will credit its contra expense account 4211 Employee Withholdings for Health Ins. The contra equity account treasury stock is reported right on the balance sheet. Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period.

A contra liability account is not classified as a liability, since it does not represent a future obligation. 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.