What is a Contra 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. For example, a company pays for medical insurance on behalf of its employees, which it records in an employee benefits expense account. Then, when the employee-paid portion of the expense is paid to the company by employees, these reimbursements are recorded in a benefits contra expense account.

Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete. Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods. In this scenario, a write-down is recorded to the reserve for obsolete 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. The national brand gives the grocery store cash, reducing the overall cost of printing the flyer. The purpose of the Allowance for Doubtful Accounts is to track the reduction in the value of the asset while preserving the historical value of the asset.

  • Discount on Notes Receivable is a contra asset account with a credit balance that reduces the normal debit balance of its parent Notes Receivable asset account in order to present the net value of receivables on a company’s balance sheet.
  • An example of a contra liability account is the bond discount account, which offsets the bond payable account.
  • In order to pass a contra entry click on “+” and under Other click on Transfer.
  • Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc.

Contains either an allowance for returned goods, or the actual amount of revenue deduction attributable to returned goods. There is no answer to contra accounts…best i can guess is that QB does NOT have the ability. The information provided by my colleague above is to set up an account within QuickBooks Online (QBO). financial modeling In regards to your concern, the Accumulated Depreciation will not automatically set as a contra account in QBO. We still have to manually set up and track on how much we depreciate a fixed asset into this account. Let me give you the detailed steps on how to set up a contra account for accumulated depreciation.

A contra account offsets the balance in another, related account with which it is paired. Contra accounts appear in the financial statements directly below their paired accounts. Sometimes the balances in the two accounts are merged for presentation purposes, so that only a net amount is presented.

Example of a Contra Expense

In accounting, refunds are handled through a contra-revenue account known as the sales returns and allowances account, reports Accounting Coach. When you issue a refund, you make a refund double entry, which means you must adjust two separate accounts in your records. Overall, revenue and contra expense are two distinct accounting concepts. While revenue increases a company’s net income, contra expense reduces it. Furthermore, revenue is reported on the income statement while contra expense is not.

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. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. The purpose of a contra expense account is to record a reduction in an expense without changing the balance in the main account.

  • 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.
  • In other words, the contra liability account is used to adjust the book value of an asset or liability.
  • A contra account is a general ledger account that offsets the balance of a corresponding account with which it’s paired.

I strongly suggest having a trained Accountant do this (or something in a similar vein) if you need it done for your business. Revenue is the income generated by a business through the sale of goods or services. Contra expense, on the other hand, is an expense that is offset against income in the same accounting period. It is a type of internal transaction that does not appear in the income statement. Contra expense accounts can be used to track expenses or income from other accounts in the general ledger. They can be used to create a running total of what is owed or received from third parties and can be used to balance the books.

These are transactions that are recorded between cash and bank accounts. 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. The bond is listed on the balance sheet at the full amount of $1,000, but the cash received is just $950, so a contra liability for the discount is listed to make the entry balance. The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline.

Contra assets

The contra liability account is less common than the contra asset account. An example of a contra liability account is the bond discount account, which offsets the bond payable account. A contra liability account is not classified as a liability, since it does not represent a future obligation. A contra asset is paired with an asset account to reduce the value of the account without changing the historical value of the asset. 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.

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 liability that is recorded as a debit balance is used to decrease the balance of a liability.

Contra Expense Account

It is especially important to track sales returns separately and on a trend line, since this can provide important evidence of problems with a company’s products that are causing customers to return goods. Contra expense is an important component of financial accounting as it allows organizations to offset income and expenses in the same reporting period. This helps them to accurately present their financial position to both internal and external stakeholders.

When to Use a Contra Expense Account

The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables. Companies that issue bonds are likely to use contra liability accounts. If the bond is sold at a discount, the company will record the cash received from the bond sale as “cash”, and will offset the discount in the contra liability account. As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find. Companies bury them in the footnotes and often don’t break out the actual calculation.

Contra revenue

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What is an example of a contra equity account?

Of that amount, it is estimated that 1% of that amount will become bad debt at some point in the future. This means that the $85,000 balance is overstated compared to its real value. At this point, it isn’t known which accounts will become uncollectible so the Accounts Receivable balance isn’t adjusted.

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