Contra Account: A Complete Guide + Examples

Accumulated Depreciation is a contra asset that pairs with Fixed Assets. Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset. A Fixed Asset is a Long-term Asset used by a company to create revenue. Each year of an asset’s life, another year of Depreciation Expense is recorded. The offset to the Depreciation Expense account is Accumulated Depreciation. Sometimes, we have an ancillary balance whose normal balance is the same as that of the parent account.

What is a Contra Expense?

This indicates that out of $100,000 sales, your customers return goods valued at $500. The sales discounts contra revenue account records the discounts given to customers on sales made to them, normally a cash or settlement discount. The account is normally a debit balance and in use is offset against the revenue account which is normally a credit balance. Consequently the net balance of the two accounts shows the net value of the sales after discounts. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Accumulated depreciation reflects the reduction in value of a fixed asset.

QuickBooks Support

• When the two balances are offset against each other they show the net balance of both accounts.
• For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance.
• As can be seen using the two accounts, allows information about the original sale to be maintained on the revenue account, and details of the sale returns to be maintained on the sales returns contra revenue account.
• Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares.
• Since you no longer have the shoes, aka the asset, you record a $20 expense on your income statement, But you also record $30 in revenue from the sale, so your net income is $10.

To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts. Since it is a contra asset account, this allowance account must have a credit balance (which is contrary to the debit balances found in asset accounts). The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable. Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000. Discount on Bonds Payable is a contra liability account with a debit balance that reduces the normal credit balance of its parent Bonds Payable liability account in order to present the net value of payables on a company’s balance sheet.

Example #1: Revenue Contra Account

Examples of contra expense accounts include Purchase Returns, Purchase Discounts, and Advertising Reimbursements. For the purpose of presentation on primary financial statements, we are often concerned only with the net figure of two similar classes/balances which we determine by subtracting one account from the another. For example, it is not very useful to show the PPE cost account and the related accumulated depreciation account separately on the balance sheet. We are better off subtracting the accumulated depreciation account (the contra account) from PPE cost account (the parent account) to arrive at the net balance of the PPE. By using contra expense accounts, financial statement users can gain a more accurate and detailed understanding of the company’s expense structure, allowing for better financial analysis and decision-making.

• Similarly, accumulated depreciation accounts reduce the value of the fixed assets you report on your financial statements.
• Sometimes, we have an ancillary balance whose normal balance is the same as that of the parent account.
• 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.
• Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation.
• Contra equity accounts carry a debit balance and reduce equity accounts.
• For example, we need separate accounts to hold the actual cost of property, plant and equipment (PPE) and related accumulated depreciation.

Cash Flow Statement

Accumulated Depreciation is a contra asset account with a credit balance that reduces the normal debit balance of Property, Plant and Equipment fixed assets in order to present the net value of long-term capital assets on a company’s balance sheet. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities includes discounts on notes or bonds payable. Contra liability accounts are not as popular as contra asset accounts. Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements.

Bookkeeping

• QuickBooks Online has different interphase and features compared to QuickBooks Desktop.
• There is no answer to contra accounts…best i can guess is that QB does NOT have the ability.
• In other words, contra revenue is a deduction from gross revenue, which results in net revenue.
• When the contra account reads $500 and the normal credit balance is $100,000, then your net sales are $99,500.
• Contra liabilities reduce liability accounts and carry a debit balance.
• The sales discounts contra revenue account records the discounts given to customers on sales made to them, normally a cash or settlement discount.

We still have to manually set up and track on how much we depreciate a fixed asset into this account. 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. A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting.

• These contra revenue accounts tend to have a debit balance and are used to calculate net sales.
• In this example, the contra expense account (Purchase Discounts) is used to provide a more accurate and detailed representation of the company’s expenses, allowing for better financial analysis and decision-making.
• Treasury stock and owner’s drawing account are examples of contra equity accounts.
• For more details about this one, I would recommend consulting your accountant and getting further assistance from them.
• A separate account used in such a situation is sometimes called a adjunct account.

It is not classified as a liability since it does not represent a future obligation. For example, when a line item on your balance sheet presents the balance of accounts receivable, report the value of allowance of uncollectible Contra Expense Account accounts below the accounts receivable line. Be sure to enter the contra account on the opposite column of the account they’re offsetting. If contra assets appear in the credit column, record contra liabilities on side.

US tax treatment of expense accounts

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