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. A second example of a contra asset account is Accumulated Depreciation.
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.
Contra expense accounts are rarely used, because organizations find it to be easier to record third-party payments directly against an expense account. However, these accounts are still useful when dealing with large quantities of reimbursements, where it is cleaner and less confusing to store the information in a separate account. Thus, the use of a separate contra expense account makes it easier to monitor the flow of expenses and reimbursements. While capitalization increases assets and equity, amortization is reflected as an expense on the income statement and reduces net income.
What Is the Difference Between a Sales Return & a Sales Allowance?
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. They are also useful for businesses that need to track transactions between multiple accounts. 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.
- A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet.
- A key example of contra liabilities includes discounts on notes or bonds payable.
- The contra liability account would be used to offset the liability account on the balance sheet.
- While revenue increases a company’s net income, contra expense reduces it.
Taken together, the asset account and contra asset account reveal the net amount of fixed assets still remaining. A contra asset account is not classified as an asset, since it does not represent long-term value, nor is it classified as a liability, since it does not represent a future obligation. Obsolete, Unsold and Unusable Inventory are contra asset accounts with a credit balance that https://quick-bookkeeping.net/ reduce the normal debit balance of the main Inventory asset account in order to present the net value of inventory on a company’s balance sheet. 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.
The Contra Revenue Account
Discount on Bonds Payable is a contra liability account with a debit balance that reduces the normal credit balance of its parent Bonds Payable liability account in order to present the net value of payables on a company’s balance sheet. The company has a contra asset account for accumulated depreciation expense and a separate asset account for equipment cost. The contra asset account would be used to offset the equipment account on the balance sheet. For example, if the company purchased a computer for 1,000 and it had a five-year life expectancy using straight-line depreciation, the contra account would be debited for 200 each year (the 1,000 divided by 5 years). Purchase returns, allowances and discounts are all examples of contra expense accounts. The accounts normally have a credit balance and in use are offset against the purchases account which is normally a debit balance.
How to attract private equity investment to your firm
One of the key benefits of amortization is that as long as the asset is in use, it can be deducted from a client’s tax burden in the current tax year. And, should a client expect their income to be higher in future years, they can use amortization to reduce taxes in those years when they hit a higher tax bracket. The amount due from the customer has been posted to the accounts receivable ledger, whereas the amount due to the supplier is posted to the accounts payable ledger. ABC Computers makes sales of 90,000; unfortunately, due to a fault in a product, they received returns of 2,500. The sales will still show a sales credit on the profit and loss of 90,000, but there is also a contra returns account with a debit of 2,500.
What is the difference between amortization and depreciation?
For example, a contra accumulated depreciation account can offset a fixed asset. A contra expense account is an account used to reduce the amount of an expense without changing the balance in the main expense account. Examples of contra expense accounts include https://kelleysbookkeeping.com/ Purchase Returns, Purchase Discounts, and Advertising Reimbursements. 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.
Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. A contra expense is an account in the general ledger that offsets a specific expense account. It is used when a company initially pays for an expense item and is https://bookkeeping-reviews.com/ then reimbursed by a third party. An example of this is when a company pays for medical insurance for its employees and records it as an employee benefits expense. The reimbursements from employees are recorded in a benefits contra expense account, which results in a reduced total benefits expense for the company.
Types of Contra Accounts for Revenues
Typically, the accumulated amortization account is reflected on the balance sheet as a contra account (which offsets the balance in a related account) and is tied with the intangible assets line item. Let’s consider a fictional example of a small retail business called “GadgetHub” to illustrate the use of a contra expense account in financial accounting. When looking at the balance sheet, it is essential to understand what is being shown on the two sides – the assets debit balance and the liabilities credit balance. The assets are always shown on the left-hand side, and the liabilities are always displayed on the right-hand side. Accumulated Depreciation is a contra asset that pairs with Fixed Assets.
Another description of a contra expense account is an account that reduces or offsets the amounts reported in another general ledger expense account(s). The debit balances in the above accounts are amortized or allocated to an expense, such as Interest Expense over the life of the bonds or notes payable. The cost of goods sold (COGS) account will have a debit balance of $100,000, representing the initial cost of the inventory. The purchase discounts account will have a credit balance of $2,000 (2% of $100,000), which represents the discount received from the supplier. An allowance for doubtful accounts is a contra asset account that is used to offset Accounts Receivable on the balance sheet. This account is used to estimate the amount of money that is not likely to be collected from customers.