What is a Contra Expense?

Each year of an asset’s life, another year of Depreciation Expense is recorded. The offset to the Depreciation Expense account is Accumulated Depreciation. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. In other words, contra revenue is a deduction from gross revenue, which results in net revenue.

Therefore, for these three, the debit balance actually represents a negative amount. 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. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. These contra revenue accounts tend to have a debit balance and are used to calculate net sales. A contra asset is paired with an asset account to reduce the value of the account without changing the historical value of the asset.

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A contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability. Purchase Discounts, Returns and Allowances are contra expense accounts that carry a credit balance, which is contrary to the normal debit balance of regular expense accounts. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value. Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances.

Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement. The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet.

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. In revenue reporting, contra accounts like sales returns and allowances adjust gross sales to present net sales, ensuring revenue figures are not overstated. This is particularly relevant for businesses with high return rates, as it provides a clearer picture of operational efficiency and customer satisfaction. Purchase Discounts, Returns, Allowances and other contra expense accounts may be presented on the income statement as individual line items or aggregated into a single contra-expense line if immaterial or preferable.

• Under accounting standards like those outlined by the Financial Accounting Standards Board (FASB), businesses estimate and record these allowances to report accounts receivable at their net realizable value.
• Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees.
• First, we need to record the entry to show the purchase of the inventory.
• Allowance for Doubtful Accounts pairs with the Bad Debts Expense account when doing adjusting journal entries.
• Each of the accounts in a trial balance extracted from the bookkeeping ledgers will either show a debit or a credit balance.

What is a Contra Revenue Account?

First, we need to record the entry to show the purchase of the inventory. A company receives rebates for advertising it does on behalf of brands it carries in its stores. For example, a grocery store displays advertisements for a national brand in its weekly flyer.

Normal Balances of Accounts Chart

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. Accruing tax liabilities in accounting involves recognizing and recording taxes that a company owes but has not yet paid. This is important for accurate financial reporting and compliance with… For this reason the account balance for items on the left hand side of the equation is normally a debit and the account balance for items on the right side of the equation is normally a credit. On the income statement, the net cost of goods sold will be reported as $98,000 ($100,000 – $2,000), reflecting the impact of the purchase discount.

How to Calculate Straight Line Depreciation

Examples of contra assets include Accumulated Depreciation and Allowance for Doubtful Accounts. Unlike an asset which has a normal debit balance, a contra asset has a normal credit balance because it works opposite of the main account. The discount on bonds payable the contra account purchases discount has a normal debit balance. 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. 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. 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. A copy of Carbon Collective’s current written disclosure statement discussing Carbon Collective’s business operations, services, and fees is available at the SEC’s investment adviser public information website – or our legal documents here.

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. Kristin is a Certified Public Accountant with 15 years of experience working with small business owners in all aspects of business building. In 2006, she obtained her MS in Accounting and Taxation and was diagnosed with Hodgkin’s Lymphoma two months later.

The Ultimate Guide To Accounting Project Management

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. No salvage value is expected at the end of the van’s useful life. For reference, the chart below sets out the type, side of the accounting equation (AE), and the normal balance of some typical accounts found within a small business bookkeeping system.

The national brand gives the grocery store cash, reducing the overall cost of printing the flyer. 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. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting.

The value of Inventory dropped $3,000, which moves to the income statement as an expense. When recording sales transactions, we still must be concerned with whether the company uses perpetual or periodic inventory. Under the periodic method, we do not update the value in the inventory account until we do the adjusting entries at the end of the period. Therefore, we should never use the inventory account in purchase transactions for companies that use the periodic method.

Purchase returns, allowances and discounts are all examples of contra expense accounts. The accounts normally have a credit balance and in use are offset against the purchases account which is normally a debit balance. The net balance of the accounts shows the net value of the purchases made by the business for the accounting period. 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 accounts are more commonly paired with asset accounts, such as accounts receivable or inventory, to reduce the carrying values of those assets. A liability that is recorded as a debit balance is used to decrease the balance of a liability.