Contra Account Definition

Note, by the way, that depreciation expense works in this way to implement the accounting matching concept. This idea is the universal principle that firms report revenues when they earn them, matching them in the same period with the expenses that brought them.

• “Allowance for doubtful accounts,” however, is a contra asset account that reduces the impact contribution by Accounts receivable.
• A depositor’s bank account is actually a Liability to the bank, because the bank legally owes the money to the depositor.
• A contra expense account will behave in the opposite way a normal expense account will; instead of debiting to increase, a contra account must credit to increase.
• As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find.

The company’s income statement will report the combination of the amounts in accounts 4210 and 4211 in order to show the company’s actual expense of $8,000 ($10,000 minus $2,000). Small businesses using the double-entry accounting method should get well acquainted with the contra account. This type of account helps balance your accounting records to accurately portray expenses that come up through the course of business. For example, a contra account can help you factor in a sales discount or a customer who won’t pay what’s owed. The Balance sheet example running throughout the Business Encyclopedia has several contra account examples.

Finance Your Business

The same is true for other asset accounts like accounts receivable. Accounts receivable is rarely reported on the balance sheet at its net amount. Instead, it is reported at its full amount with an allowance for bad debts listed below it. Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off. The benefit of using the contra expense account is that the company’s managers can look in account 4210 to immediately see the company’s total cost of the health insurance. They can also easily see in account 4211 the amount that the employees paid. The income statement could simply report the net amount of the expense, which is $8,000 ($10,000 minus $2,000).

• Most accounts receivable would just be the time between purchase and credit card settlement.
• An accumulated depreciation account is a type of contra asset account that is used for recording the amount of depreciation a fixed asset evolves through.
• At the end of the month, the smaller amount in his account from one ledger is transferred to his account in the ledger with large amount.
• The company predicts which accounts receivable won’t be paid by customers and writes those off.
• If the credit is due to a bill payment, then the utility will add the money to its own cash account, which is a debit because the account is another Asset.

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Is A Contra Account An Expense Account?

It even allows you to sync up with your other accounts, like Gmail. Emilie is a Certified Accountant and Banker with Master’s in Business and 15 years of experience in finance and accounting from large corporates and banks, as well as fast-growing start-ups. A statement of changes refers to relevant alterations in profits, policies, improvements, and investments. Learn the format and important elements to include in statements of changes in equity. Learn the definition of the periodic inventory system and understand its advantages. Investopedia requires writers to use primary sources to support their work.

This can help anyone viewing the financial information to find the historical cost of the asset. The two common contra liability accounts, discount on bonds payable and discount on notes payable, carry normal debit balances. The discount on bonds payable represents the difference between the amount of cash a company receives when issuing a bond and the value of the bond at maturity. Notes payable represents a liability created when a company signs a written agreement to borrow a specific amount of money. The lender may offer the company a discount if it repays the note early. The discount on notes payable reduces the total amount of the note to reflect the discount given by the lender. The above examples show contra asset accounts, but there are also contra liability accounts that operate in the same way.

How To Calculate Sales Returns In A General Ledger

A company can choose to state this information as separate line items on its balance sheet so that any financial planners or analysts can determine the extent to which a paired asset might be reduced. That is why asset contra-accounts have credit balances while liability contra-accounts have debit balances. A contra liability account is a liability account where the balance is expected to be a debit balance. Now, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. The following are examples of contra expense accounts used in double entry bookkeeping. Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet.

Therefore, an account number beginning with 1, for instance, must be an asset account. The firm has many customers, most of whom need their own “accounts.” In reality, even a small business may identify a hundred or more such accounts for its accounting system, while a large firm may have many thousands. Nevertheless, for accounting purposes, all named accounts fall into one of the five categories above . The term account gives its name to the profession, accounting or accountancy. A practitioner with appropriate training and certification is an accountant.

Contra Revenue

Accrued revenue is money your company has earned but hasn’t yet billed the customer for. In accrual-basis accounting, companies are allowed to record revenue on their income statement recording transactions as soon as they have done everything required to earn it. Accounts Receivable has a debit balance; its contra account, Allowance for Doubtful Accounts, has a credit balance. Allowance for doubtful accounts is netted from the accounts receivable balance. The company predicts which accounts receivable won’t be paid by customers and writes those off. When the account receivable is written off, it is added to bad debt expense on the income statement and placed in the contra account.

Accumulated Depreciation, used to diminish the value of an asset over time, is another example of a contra-account. Trade discount allowed is a direct expenditure for a business firm since it is directly relate to sales. In inventory management, a stock card can be a useful tool for tracking unit prices, sales, and other information. The definition of the matching concept in accounting is a principle that expenses relative to income must be recorded for the same time period.

Contra Assets

On May 1 Jason Pua and Roy Nelson formed the partnership called JR Landscaping. Jason contributed $8,100 cash and all of his landscaping equipment. Prepare the journal entries required to record the investment that each partner contributed in creating the partnership. Units should consider using an allowance for doubtful accounts when they are regularly providing goods or services “on credit” and have experience with the collectability of those accounts.

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Contra Equity Accounts

To calculate the overall equity of the company, expenses are subtracted from revenue to calculate the net income which is shown on the income statement. Expense accounts are categories in a company’s books that show what day-to-day running costs the business had during a specific time period. The totals show the net effect on the accounting equation and the double-entry principle, where the transactions are balanced. Although a bond discount is a contra liability account, it cannot be considered as a liability since no future obligation can be expected from it. This is especially true in cases where the contra account has a debit balance, as this will reduce the total amount of the corresponding account. Real Accounts are formal, eternal parts of company records where Nominal Accounts are summaries of cash flow for a specific time period.

Expense Accounts

In such cases, the seller may appoint one of its own sales staff as Account Manager, focusing primarily on that account. Account managers in this sense are responsible for sales performance with this customer. And, they are also responsible for building a continuing customer-seller relationship with the account.

Marketing is important to create and spread awareness of business & its product line. Companies such as Coca Cola, Colgate, Unilever, etc., spend huge sums on advertising. All “mini-ledgers” in this section show standard increasing attributes for the five elements of accounting. Upon receipt of the invoice, the customer paid in cash immediately. Sales Discounts – Amount of discount given to customers who are usually able to pay earlier than the due date of an invoice.

Reference Numbers Organize The Chart Of Accounts

This impact could occur in “Account 163, Factory manufacturing equipment” from the Chart of accounts below. Accounts in any business hold important information regarding different aspects of the entity and its operations. And to keep the information relevant and reliable these accounts needs to be updated to record all such transactions that relates to particular account. For example, funds deposited in the bank account and withdrawn are recorded in the Bank account. In the cash basis of accounting of expenses, the transaction is recorded as soon as cash is paid off. On an accrual basis, the transaction is recorded when the expense is incurred irrespective of the cash payout date.

Controlling expenses is an extremely important task for financial managers today. Optimization of expenses can help companies outperform the industry. However, this should also be done in a way where quality is not compromised. Lowering costs by reducing quality can come to haunt a company in the form of severe penalties or ultimately closure of operations. Operating expenses are the expenses that a company incurs in generating operating revenue. It could also be explained as the expenses incurred to run the core operations of an organization.