A contra account is a general ledger account with a balance that is opposite of the normal balance for that account classification. The use of a contra account allows a company to report the original amount and also report a reduction so that the net amount will also be reported. The net amount is often referred to as the carrying amount or perhaps the net realizable amount.
What are Contra Accounts?
Because contra asset accounts are used so frequently, it’s worth spending a little bit more time on them here, including common subtypes. 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 contra revenue account 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. Contra revenue refers to deductions from your business’s gross sales, including sales returns, allowances, and discounts.
- Accounts receivable is rarely reported on the balance sheet at its net amount.
- In your financial statements, contra revenue accounts appear as deductions from gross sales to arrive at net sales.
- In order to record this ongoing value drop, you would use a corresponding contra account — an Asset Depreciation account.
- Any products that are sold at a discount or returns are deducted from gross revenue to produce net revenue as the top line on the income statement.
What is contra revenue, and how does it differ from gross and net revenue?
Whether in-house or outsourced, utilising dedicated accounting and bookkeeping teams ensures accurate recording of contra revenue. Additionally, employing AI-powered accounting software can streamline the process and reduce the likelihood of errors. To account for this, you would debit $50,000 in Accounts Receivable and credit $50,000 in Sales. If a client returns $1,000 worth of products, you record Sales Returns and Allowances by debiting $1,000 and crediting $1,000 to Accounts Receivable.
Why should one include contra accounts on a balance sheet?
A business called Show-Fleur offers private driving tours of local botanical gardens — all from the comfort of high-end limousines. For its day-to-day operations, the business maintains a fleet of 75 identical 2016 Ford Explorer limousines, each initially retailing at $150 thousand. However, these vehicles have experienced significant wear and tear in the intervening years. And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand.
How are contra accounts recorded?
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. Accounting software can simplify the management of and reporting from your ledger. With the appropriate level of automation integration in your chosen tool, you can pull the relevant values into these individual accounts directly from invoices, credit agreements, and other documentation. Rather than pay this cost up-front and tie up a significant chunk of capital, Show-Fleur makes this purchase on credit with a 90-day due date after invoicing. Fortunately, the seat vendor offered an early payment discount of 5%, meaning that when Show-Fleur paid off its full credit note within the first 30 days, it recouped $30 thousand in savings. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.
- The credit balance in Notes Payable minus the debit balances in Discount on Notes Payable is the carrying value or book value of the notes payable.
- To obtain a cash payout before the note reaches maturity, you can sell these notes to a bank or other financial institution for some price below the note’s face value.
- Home Depot also devotes footnote 4 to its share repurchase program and reports that the company is authorized by its board to repurchase $20 billion in shares.
- This distinction is crucial because it affects how you analyze your business’s revenue performance and profitability.
- The amount in the accumulated depreciation account is deducted from the assets of a company, such as buildings, vehicles and equipment.
What Is the Benefit of Using a Contra Account?
