Contra Account Definition, Types, and Example

The difference between an asset’s balance and the contra account asset balance is the book value. Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value. For example, GAAP accounting (or generally accepted accounting principles) requires fixed assets to be reported at cost on the balance sheet, but, over time, that value depreciates as the assets are used. 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. One of the basic and most important differences between both is the natural balance of asset account and revenue account.

• A contra account for revenues, i.e., a revenue account that has a debit balance, rather than the credit balance of a typical revenues account.
• In the above case, the company will bear a loss margin of $100, and the contra revenue amount is $100.00.
• Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns.
• The balance of the contra account will offset its parent account while still preserving the value of the transactions recognized in the relating account.

Credit sales are often risky because the chance of not collecting on the accounts receivable increases uncollectable percentages of credit sales, where the amount must be estimable and probable. Accounting for the contrary in a business will show the normal business account value, the attached contra account underneath it, with the net revenue the business experienced below. Whereas assets normally have positive https://www.bookstime.com/articles/sales-journal debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. 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, which can make tax preparation more difficult and time-consuming.

CONTRA REVENUE ACCOUNT Definition

As the first item listed on a financial statement, it becomes the pivot or anchor from which other line items are proportional to. Depreciation and SG&A expenses are deducted from gross profit to find the operating margin, also known as EBIT. EBIT less interest expense is pre-tax income, and pre-tax income minus taxes is net income.

Examples of revenue contra accounts are Sales Discounts, Returns and Allowances. 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.

What Is the Difference Between a Sales Return & a Sales Allowance?

Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period. 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. The most common type of contra account is the contra-asset account.

The equity section of the balance sheet is where the shareholder’s claims to assets are reported. The main contra equity account is treasury stock, which is the balance of all stock repurchased by the company. When a company repurchases shares, it increases contra revenue account the fractional ownership of all remaining shareholders. As asset accounts have debit balances, contra asset account will have credit balance. This is done in order to separate data in these accounts for the analysis and presentation purposes.

Similarities- Contra Asset vs Contra Revenue Account

Contra account balances do decrease balances of the main accounts and then the net balance is reported in the financial statements. Contra account is important as it not only allows a company to report the original amount of a transaction but also report any reductions that may have happened so that the net amount will also be reported. They are useful in preserving the historical value in the main account while presenting a write-down or decrease in a separate contra account that nets to the current book value.

Contra liabilities are common in companies that sell bonds to raise capital. To drum up interest in the bond, the company will sell it at a discount. For example, a bond with a principal amount of $1,000 may be sold for only $950.

What is the purpose of contra-revenue accounts? Also, give two examples of contra-revenue…

To report the real value of the financial statement, you will need to record the amount you can reasonably estimate that will probably effect the financial statement classification. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. The sales allowances account contains either an allowance for reductions in the price of a product that has minor defects, or the actual amount of the allowance attributable to specific sales. There are many situations where one account is used to offset another account. One common example is accumulated amortisation, which is a contra-asset account.

• 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.
• Examples of contra revenue a/c are sales allowances and sales discounts.
• Company K’s income statement will report the gross Sales of $100,000 minus the sales returns and allowances of $500 and the resulting net sales of $99,500.
• 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.