Contra Account Definition + Journal Entry Examples

The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own.

This question is asked by many students, accountants, and professionals. This article will give you the definition of contra in accounting, talk about different contra accounts, and give examples. In this way, the historical cost, the amount of write-off, and the book value of an asset can always be seen on the balance sheet. Whenever the balance of an account what is contra revenue needs to be reduced in a company’s ledger, it is not always applicable to credit the account if it is an asset or debit the account if it is a liability. Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers. The amount is not reported, and the net sales amount is reported on the income statement.

What is a contra account?

This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms. Most accounts receivable would just be the time between purchase and credit card settlement. If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative. On the other hand, if you’re looking at a high-flying growth stock that reports new revenue growth records each quarter but has a massive allowance for doubtful accounts, there may be problems ahead. At Zeni, we keep it simple for you to record all of your contra revenue in one dedicated place and view the changes to your accounts over time AND in real-time.

• In this case, you will debit your asset by $8,00,000 and you will reduce the balance of the asset account by $8,000.
• Tesla’s Cybertruck, which launched recently, has received mixed reviews, with analysts cautioning that the newest EV from the company’s stable will contribute marginally to growth.
• Therefore, the book value of an asset in the books is equal to its historical cost (the debit balance of the asset) minus the related amount of contra asset in the balance sheet (the credit balance of the contra asset).
• Meanwhile, a department manager can spontaneously decide “We tried 30% off in our sale last summer.
• Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.

In double entry bookkeeping terms, a contra revenue account or contra sales account refers to an account which is offset against a revenue account. Contra revenue accounts appear near the top of the income statement, as a deduction from gross revenue. If the amounts of these line items are minimal, they may be aggregated for reporting purposes into a single contra revenue line item. Accumulated Depreciation is a contra asset that pairs with Fixed Assets. Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset. A Fixed Asset is a Long-term Asset used by a company to create revenue.

Contra Asset, Contra Liability and Contra Equity

If a company has a high or fast-growing allowance as a percentage of accounts receivable, keep a close eye on it. It could be growing with bad accounts, and cash flow will be affected. For instance, if a company sells a product but later accepts it back for a refund, the sale is reversed through a contra revenue account. Similarly, discounts given at the point of sale also reduce the total revenue. It’s important to track contra revenue as it impacts the net revenue reported on the income statement, which in turn affects the business’s profitability and overall financial health. For instance, you buy a car worth $8,00,000 and you will depreciate it by $8,000 per year for the normal wear and tear of the car.

• Whenever the balance of an account needs to be reduced in a company’s ledger, it is not always applicable to credit the account if it is an asset or debit the account if it is a liability.
• The most extreme expectations I have seen have been in China and some Middle-Eastern countries.
• It is important to realize that unearned revenue is not a contra revenues account.
• The balance in the contra account is reduced when the corresponding asset or liability it is paired with is disposed of.
• Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value.
• The analyst based his most recent view on expectations that electric vehicle demand will falter and likely lead to deeper price cuts.

The contra equity account would be used to offset the equity account on the balance sheet. This would give a more accurate picture of the company’s equity. The company estimates that it will not be able to collect 1,000 from its customers. The allowance for doubtful accounts is a contra asset account that is used to offset Accounts Receivable on the balance sheet. The contra asset account Accumulated Depreciation is deducted from the related Capital Assets to present the net balance on the parent account in a company’s balance sheet. If a listed company purchases its own shares from the open market, it will have to debit the treasury stock account in order to record the transaction.

AccountingTools

The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. 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 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.

Companies like to depreciate assets as quickly as possible to get the tax savings, so the balance sheet may not state the true value of fixed assets. The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet. A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity). The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.

What is Contra Account?

Critics of the Moores’ lawsuit have called for their case to be thrown out, because records suggest the couple has closer ties to the Indian company they invested in than their lawsuit suggests. While the lawsuit claims the couple only invested $40,000 in KisanKraft, records reported by Tax Notes claimed the Moores actually committed $400,000 to the company, and Charles Moore served as a director for the company. “I’m confident that our filings are candid and accurate,” the Moores’ attorney Dan Greenberg said in a statement to the Washington Post about the reported discrepancy.

Obsolete, Unsold and Unusable Inventory are contra asset accounts with a credit balance that 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. Above mentioned journal entry shows a stark difference between contra asset and contra revenue account. While the other is reducing the balance of the revenue account. In addition, the prior one has a credit balance  (contra asset) while the latter one (contra revenue) has a debit balance. After having elaborated examples of contra asset and contra revenue account it has become easier to understand the difference. Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements.