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. The amount of gross revenue minus the amount recorded in the contra revenue accounts equal a company’s net revenue. A transaction is made under the sales return account when a customer returns a product to the company for a refund.

The Contra Liability Account

These billings may usually be documented on invoices, which are then summarized in an aging report for all the business’s accounts receivable. A contra expense is an account in the general ledger that is paired with and offsets a specific expense account. The account is typically used when a company initially pays for an expense item, and is then reimbursed by a third party for some or all of this initial outlay.

The tricky part is that the machine doesn’t really decrease in value – until it’s sold. Balance of such accounts are under debit side, while revenue balances are under credit side. It is an account normal balance with the opposite balance to the asset account, with which such contra account is related. For example, if 3% of your sales were uncollectible, set aside 3% of your sales in your ADA account.

A reserve for doubtful debts can not only help offset the loss you incur from bad debts, but it also can give you valuable insight over time. For example, your ADA could show you how effectively your company is managing credit it extends to customers. Use the accrual accounting method if you extend credit to customers. If a customer purchases from you but does not pay right away, you must increase your Accounts Receivable account to show the money that is owed to your business.

Overzealous Asset Depreciation

It was going smoothly and i really liked it until our teacher explained contra accounts to us. I think they are accounts that have the debit and credit switched in owner’s equities (t-chart accounts) and that’s pretty much all i know. I’m lagging behind in class now because i still can’t understand what the teacher is really talking about and the book doesn’t explain contra accounts that well either. Contra accounts are helpful in determining the historical cost of a company, these accounts help financial managers and accountants keep a clean and easy-to -track financial records. Maintaining a good record of historical cost is important for tax preparation.

Since we are discussing doubtful accounts, the offset will be against accounts receivables. When determining how much uncollectible customer debt to write off, an associated account called a contra account is used. This helps to keep financial books straight while also allowing the company to see the amount in doubtful accounts.

Accumulated depreciation is accounted on the credit side and has credit balance. Accumulated depreciation reduces costs of asset and contra account is used to have cost value and accumulated depreciation separately. Overall, contra asset accounts can improve your accounting system, particularly what is a bookkeeper cash flow projections. As you can see the Expense account is properly keeping track of the expenses from depreciation while the Equipment asset is properly reflecting its value at year end. And these contra asset accounts reach zero at close out because they are emptied out into their asset.

Other contra account examples can be Allowance for Doubtful Accounts , Bond discounts, which represent contra liability account, i.e. decrease bond payable account. One advantage to using an allowance account is that it can keep track of information related to each doubtful account. While this information doesn’t come out in financial statements, it isn’t lost either. Some of this documentation will include specific customers along with the uncollected amount for each. Such information can be useful for determining future credit, pursuing future debt collection, or even if you want to keep a customer. Your allowance for doubtful accounts estimation for the two aging periods would be $550 ($300 + $250). Use the percentage of bad debts you had in the previous accounting period to help determine your bad debt reserve.

Each contra asset account serves a different specific purpose, but they are have a couple things in common, too. Contra asset accounts are used to reduce the debit balance of its corresponding asset account in order to calculate a net value for each asset. ZipBooks gives you the option to create a contra asset account automatically for any new or existing asset account that you mark as depreciable. Since asset accounts are debit accounts, a contra asset account is a credit account used to offset the balance of the main debit account.

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. By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes. For example, if a piece of heavy machinery is purchased for $10,000, bookkeeping that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately. Similarly, the company may choose to combine the amounts in both its contra and fixed asset accounts if the contra asset account has a relatively low balance. In bookkeeping, a contra asset account is an asset account in which the balance of the account will either be a zero or a credit balance.

Aging Of Accounts Receivable

Is Accumulated Depreciation A Current Asset?

Because contra assets simply detract from the total value of the asset account, all one has to do is add up all the assets together first. Finally, take the total of depreciation and subtract it from total assets. If a ledger were to be observed in this situation, then one would see a balance of three asset debits matched up against three contra asset credits .

A contra revenue account allows a company to see the original amount sold and to also see the items that reduced the sales to the amount of net sales. Here’s a short list of some example contra asset accounts and their corresponding asset accounts.

Contra revenue account is an opposite account to revenue, which decreased gross revenue balance and the result is called net revenue. If your credit policy doesn’t reflect when to write off bad debt, below are a few tips that can help get you started. Save money and don’t sacrifice features you need for your business with Patriot’s accounting software. To reverse the account, debit your Accounts Receivable account and credit your Allowance for Doubtful Accounts for the amount paid.

It is treated as a liability because the revenue has still not been earned and represents products or services owed to a customer. Both are balance sheet accounts, so the transaction does not immediately affect the income statement. It seems that another example of a contra account would be an expense bookkeeping account associated with a security deposit (eg. rental property). The interest owed on a security deposit would show as a debit in the expense account until the tenant moved and the account settled. at that time, cash is debited and the expense account credited for the interest owed/paid.

The retrained earnings is an amount of money that the firm is setting aside to pay stockholders is case of a sale out or buy out of the firm. Current assets are not depreciated because of their short-term life. Contra accounts are also applicable for Income Statement accounts. These accounts have to be closed at the end of the accounts period in the same way as the main Income Statement accounts are being closed. Find out how your business can mitigate the financial risk of receivables and eliminate Doubtful Acccounts. You can see in the above examples that the amount not collected from the customer is well documented.

Maintenance Of Historical Cost

The contra asset account is later reduced when the expense is recorded. Business owners should understand the functions of contra accounts and their importance to maintaining accurate financial records. Taking into account the list of contra asset accounts, how would you calculate the net value of assets? If the example looks difficult, rest assured the solution is very simple.

Whenever cash is received, the asset account Cash is debited and another account will need to be credited. Accounts Receivable is an asset account and is increased with a debit; Service Revenues is increased with a credit. If your expenses occur faster than agreed upon prepayments, you could end up with a situation where a prepaid expense account could start carrying a credit balance. This could happen if, for example, you’re having worker’s comp insurance premiums go up after you’ve already made payment due to a workplace accident. A contra equity account reduces the total number of outstanding shares listed on a company’s balance sheet. When a company buys back its own shares from the open market, it records the transaction by debiting the treasury stock account. A company may decide to buy back its shares when management feels the stock is undervalued or because it desires to pay stock dividends to its shareholders.

Therefore, the depreciation of the equipment increases by approximately $50,000 for each year of use. This method uses the initial purchase value and subtracts the accumulated depreciation value for the time period to result in the total value of the equipment after its use. The retained earnings is not an asset because it is considered a liability to the firm.

For instance, a contra account that relates to an accounts receivable is called a contra asset account. Transactions made to contra accounts are presented on a company’s financial statements bookkeeping for small business under the related account. Contra accounts are important because they allow a company to follow the matching principle by recording an expense initially in the contra asset account.

• Accounting entry to adjust the balance in allowance account will involve the income statement account Bad Debts Expense.
• Similarly, the company may choose to combine the amounts in both its contra and fixed asset accounts if the contra asset account has a relatively low balance.
• Assume Gem Co.’s Accounts Receivable has debit balance of $100,000 at June 30.
• In bookkeeping, a contra asset account is an asset account in which the balance of the account will either be a zero or a credit balance.
• Therefore, a contra asset can be regarded as a negative asset account.
• Gem anticipates that approximately $2000 will not return to cash, and as a result reports a credit balance of $2000 in Allowance for Doubtful Accounts.

It is often presented as a negative value underneath the main account. Contra accounts and the associated accounts are reported in dollar value. For example, an Allowance for Uncollectible Accounts is the contra account for accounts receivable which often offsets the balance of the account. An Allowance for Uncollectible Accounts is reported on a line directly below the accounts receivable in a company’s financial statements. The most common type of contra account is the contra-asset account. This type is paired with the asset account, which allows a business to record the original price or value of the asset at time of purchase. The contra asset account then allows recording of the value factoring in depreciation.