Fabio Rosales Coria 
A contra account is a general ledger account that offsets the balance of a corresponding account with which it’s paired. If you debit the contra account, ensure that you offset the related account with a credit balance. In essence, contra accounts allow you to report http://kapellanin.ru/names/?id=999 your firm’s gross and net amounts. These accounts also ensure that you follow the matching principle in accounting, which states that you record expenses in the same period you incur them. Accounts receivable is rarely reported on the balance sheet at its net amount.
On the other hand, contra revenue accounts, like sales discounts, are recorded to calculate net revenue. These accounts help in determining the true revenue earned by a company after accounting for any deductions or discounts. You may want to first classify contra https://www.businesshumans.us/custom-aluminum-cases/ accounts as contra asset accounts, contra liability accounts, contra equity accounts, or contra revenue accounts before accounting for any transaction. There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue.
Time Value of Money
For example, if a company just reported equipment at its net amount, users would not be able to observe the purchase price, the amount of depreciation attributed to that equipment, and the remaining useful life. 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 revenue accounts, such as sales discounts and returns, are recorded to calculate net sales. For instance, sales returns and allowances are recorded as a debit to the account and a corresponding credit to accounts receivable. Contra revenue accounts are used to reflect the reduction in revenue, with contra revenue contra sales relating to gross sales, and contra revenue contra revenue expense used to show the decrease in revenue.
- Contra Equity Account – A contra equity account has a debit balance and decreases a standard equity account.
- The company estimates that it will not be able to collect 1,000 from its customers.
- A doubtful debts contra account allows for future write-offs of accounts receivable.
- In other words, contra revenue is a deduction from gross revenue, which results in net revenue.
Sale on account, which can also be known as a sale on credit or credit sales, refers to when businesses give a product over to a customer and customers do not have to pay until later. 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. The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable. It also shows the carrying (net) amount of $19,000, which you report to your firm’s balance sheet.
How to Record a Contra Account
So an Accumulated Depletion account would serve as the contra for the parent Fixed Asset account. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. http://strjapuha.com/item/268 For more details about this one, I would recommend consulting your accountant and getting further assistance from them. This is to ensure that everything is accurate, and the reporting of your book is moving well. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching.
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. 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. The main advantage of using separate contra revenue accounts is that each one provides targeted information about the individual deductions taken from sales. Since each of these deductions directly reduces your profits, it makes sense to research them in detail, to see if there are any actions that can be taken to reduce the number of deductions.
