The calculations can be done weekly, monthly, quarterly, or yearly depending on the volume of your transactions; however, all transactions must be completed by June 30. Inventory https://quick-bookkeeping.net/ is typically classified as a short-term asset, since it is usually liquidated within one year. Get instant access to video lessons taught by experienced investment bankers.

• After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.
• Hence, the method is often criticized as too simplistic of a compromise between LIFO and FIFO, especially if the product characteristics (e.g. prices) have undergone significant changes over time.
• Inventory is a current asset account found on the balance sheet, consisting of all raw materials, work-in-progress, and finished goods that a company has accumulated.
• Every year, a company has an inventory that will not be able to be sold for various reasons.
• The subsequent depreciation of the cost is included in production overheads in future periods over the asset’s estimated remaining useful life.

A company which is manufacturing or selling an outdated item might see a decrease in the value of its inventory. Unless this is accurately captured in the company financials, the value of the company’s assets and thus the company itself might be inflated. The physical count process can be labor-intensive, requiring significant manpower and time. This is particularly challenging for businesses with large inventories or those that operate continuously, as they may need to close or disrupt operations to conduct counts.

So the price of shipping, advertising and a business’ sales force doesn’t apply. With this handy guide, you’ll be able to boost your profits and ensure a smooth and easy inventory accounting process. In the case of services, inventory can be the costs of a service for which related revenue has not yet been recognized.

Inventory

Cost control – If your production process is complicated, establishing thorough inventory accounting procedures for each stage of production can help you pinpoint cost inefficiencies and develop solutions to correct them. The periodic inventory system is simple and only requires an inventory spreadsheet to keep track of sales and goods remaining in stock. Basically, a count is performed periodically throughout the year to see what was sold and what was left. Although this is a very simple way to keep track of merchandise, it has many downsides. For instance, a sandwich shop’s delivery truck is not considered inventory because it has nothing to do with the primary business of making and selling sandwiches.

If you’re looking for accounting software that can track inventory for your business, be sure to check out The Ascent’s accounting software reviews. With this order, the oldest crystals in stock, which were $6 each, were sold first, along with 65 crystals from the most recent purchase. After both of these purchases were completed, you were left with 35 crystals in stock, all valued at $5 each for a total value of $175. This can be seen most prominently in products that require exceptional time or expense in secondary stages of production. Items such as pharmaceuticals, machinery, and technology are three products that require large amounts of expense after their initial designing.

Several methods—First-In, First-Out (FIFO), Last-In, First-Out (LIFO), and the Weighted Average—exist for calculating inventory costs, each with advantages and disadvantages. Because inventory is a business asset, accountants must consistently and appropriately use an acceptable, valid method for assigning costs to inventory to record it as an asset. Raw materials, work in progress, and finished goods remaining on-site should all be considered part of the inventory. Both cost of goods sold and inventory valuation depend on accounting for inventory properly. In other words, these goods and materials serve no other purpose in the business except to be sold to customers for a profit.

Estimate Ending Inventory

Inventory management forecasts and strategies, such as a just-in-time (JIT) inventory system (with backflush costing), can help companies minimize inventory costs because goods are created or received only when needed. Consignment inventory is the inventory owned by the supplier/producer (generally a wholesaler) but held by a customer (generally a retailer). The customer then purchases the inventory once it has been sold to the end customer or once they consume it (e.g., to produce their own products). The other item the GAAP rules guard against is the potential for a company to overstate its value by overstating the value of inventory.

How to do inventory accounting with the LIFO method

Departments receiving revenue (internal and/or external) for selling products to customers are required to record inventory. Inventory accounting is a critical aspect of business operations beyond mere stock-keeping. Inventory is a current asset because it converts to revenue within a short time frame, typically within a year. The transition from an asset to an expense – Cost of Goods Sold (COGS) occurs after a sale.

If you own a merchandising business—for example, a shoe store that purchases shoes from manufacturers or wholesalers and sells these shoes to consumers—your inventory accounting system is somewhat straightforward. Retailers typically only list one type of merchandise on their balance sheet where as manufacturers tend to list the three different categories of inventory separately. The perpetual inventory system is a highly sophisticated system that keeps tracks of goods as they are purchased and sold in real time using a bar code scanner and computer system. Say, for instance, a company produces and sells an item that is steadily losing value but the inventory accounting doesn’t accurately record this value decrease, this can result in an inflated company valuation.

Challenges in supplier relationship management

DIO is usually first calculated for historical periods so that historical trends or an average of the past couple of periods can be used to guide future assumptions. Under this method, the projected inventories balance equals the DIO assumption divided by 365, which is then multiplied by the forecasted COGS amount. In order to project a company’s inventories, most financial models grow it in line with COGS, especially since DIO tends to decline over time as most companies become https://bookkeeping-reviews.com/ more efficient as they mature. Inventory refers to the raw materials used by a company to produce goods, unfinished work-in-process (WIP) goods, and finished goods available for sale. Like IAS 2, transport costs necessary to bring purchased inventory to its present location or condition form part of the cost of inventory. Unlike IAS 2, US GAAP does not contain specific guidance on storage and holding costs, which may give rise to differences from IFRS Standards in practice.

Inventory devaluation reduces (C) the Inventory object code for the devaluation of goods not sold over time and increases (D) the Cost of Goods Sold object code in the sales operating account. Inventory overage occurs when there are more items on hand than your records indicate, and you have charged too much to the operating account https://kelleysbookkeeping.com/ through cost of goods sold. Inventory shortage occurs when there are fewer items on hand than your records indicate, and/or you have not charged enough to the operating account through cost of goods sold. Inventory can be defined as the items that your business has bought with the further intention of reselling to their customers.

What Is Inventory Accounting?

When an inventory item is sold, its carrying cost transfers to the cost of goods sold (COGS) category on the income statement. Since the cost of goods sold and inventory values are only determined at the end of the period, financial reports may not accurately reflect the business’s current financial status. This can impact the reliability of financial statements for investors, creditors, and management. This system typically requires minimal investment in both the setup and ongoing operations. There’s no need for expensive inventory management software or sophisticated tracking equipment, making it a cost-effective solution, especially for small businesses or startups operating on tight budgets.

Specifically, inventory accounting means businesses can better gauge where they are able to increase profit margins. GAAP requires businesses to record inventory accurately and enforces a rigorous set of standards in order to achieve this. It prohibits businesses from both understating and overstating the value of their inventory, since doing so can lead to a company having an inflated valuation. In a similar vein, inventory is an asset, and as a result, overstating the value of inventory can give the impression that a company has greater assets than it really does. A business can save a great deal of cash by managing its inventory as tightly as possible.

In any case, there will likely be a deadline for deciding, and the decision will be final. There are several things to consider when choosing between a monthly annuity and a lump sum. Upon retirement, when the account holder starts withdrawing funds from a qualified pension plan, federal income taxes are due. Contributions employees make to the plan come « off the top » of their paychecks—that is, are taken out of the employee’s gross income. That effectively reduces the employee’s taxable income, and the amount they owe the IRS come tax day. Funds placed in a retirement account then grow at a tax-deferred rate, meaning no tax is due on the funds as long as they remain in the account.

• There are very specific requirements around pension accounting, which will be outlined in this article.
• Under US GAAP, multi-employer plans are accounted for in a manner similar to defined contribution plans with related disclosures.
• When the employee dies, the pension payout stops, but a large tax-free death benefit is paid out to the surviving spouse, which can be invested.
• While both the 403(b) and 401(k) are tax-deferred, a 403(b) is much less common as it is restricted to those in non-profit, charitable organizations, and public schools and colleges.
• In fact, KPMG LLP was the first of the Big Four firms to organize itself along the same industry lines as clients.

It would then give the pension money to an outside investment firm to manage or invest the funds itself. John has no say in what the company invests in, and he has to trust that they will be able to make their payouts from the plan come retirement. While defined benefit plans can be structured similarly in the US and outside of the US, their accounting and presentation can significantly differ between IAS 19 and US GAAP. In addition, when the actuarial valuations are outsourced, management still is responsible for the overall accounting. Therefore, dual reporters need to understand their actuaries’ experience and background, making sure that they have adequate knowledge of these GAAP differences. In a defined contribution plan, the employee makes contributions, which may be matched by the employer.

Pension Plans: Factoring in ERISA

Accordingly, if an actuarial method other than the projected unit credit method is used under US GAAP, measurement differences will arise. There are a number of differences between the accounting requirements for defined benefit plans under IAS 19 and US GAAP requirements. Top 10 differences in accounting for defined benefit plans under IAS® 19 and ASC 715. These may include https://quick-bookkeeping.net/ pretax contributions that reduce an employee’s taxable income—plus potential tax-write offs for the employer. Alternatively, plans can allow post-tax Roth contributions, which can give an employee tax-free income in retirement. Some plans allow participants to do both; that is, they can take some of the money in a lump sum and use the rest to generate periodic payments.

• Though employees typically have less control over their money and sacrifice upside earning potential under a pension plan, it is usually a safer option, and the benefits an employee earns is paid out to them for life.
• Here is some information on the salaries and personal contributions of two employees.
• If your employer offers matching on your contributions, it is best to contribute at least the maximum amount they will match, as this is essentially free money that will grow over time and will benefit you in retirement.
• In addition, people must often meet a vesting requirement by working for a company for a specific amount of time to quality for pension plan benefits.
• IAS 19 mandates the projected unit credit method to determine the present value of the defined benefit obligation and related current service cost.

For this reason, a growing number of private companies are moving to the defined contribution plan. The best-known defined contribution plans are the 401(k), and its equivalent for non-profit employees, the 403(b). A defined-contribution plan is more popular with employers than the traditional defined-benefit plan for a few reasons. With the former, employers are no longer responsible for managing investments on behalf of employees and ensuring that they receive specific amounts of money in retirement. If John’s employer offered a defined-benefit plan, his employer would fund the pension itself, perhaps with some extra contributions from John.

What Is A Defined Contribution Plan?

As he approached retirement age, John made sure he invested less aggressively to try to maintain the stability of his account’s value. The 401(k) is perhaps most synonymous with the DC plan, but many other options exist. The 401(k) plan is available to the employees of publicly-owned companies. The 403(b) plan is typically open to employees of nonprofit corporations, https://business-accounting.net/ such as schools. There is no way to know how much a DC plan will ultimately give the employee upon retiring, as contribution levels can change, and the returns on the investments may go up and down over the years. The 120,000 service cost is recorded as an operational item, while the remaining things are included as a net interest expense of 39,500 (84,500 – 45,000).

With this plan, the contributions will be paid by the company into a separate entity. At retirement, the employee may choose to receive this sum as a fixed annuity each year. The total amount of the pension at retirement is unknown because as contributions are invested, the value of the pension could increase or decrease up until retirement. A defined contribution pension plan is one in which the employer contributes an amount into each eligible employee’s account within an established plan.

Defined Contribution Vs. Defined Benefit Plans

The Thrift Savings Plan (TSP) is used for federal government employees, while 529 plans are used to fund a child’s college education. Other features of DC plans include automatic participant enrollment, automatic contribution increases, hardship withdrawals, loan provisions, and catch-up contributions for employees aged 50 and older. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance.

IAS 19 imposes an asset ceiling; US GAAP does not

While they are rare in the private sector, defined-benefit pension plans are still somewhat common in the public sector—in particular, with government jobs. Defined-benefit plans provide eligible employees with guaranteed income for life when they retire. Employers guarantee a specific retirement benefit amount for each participant based on factors such as the employee’s salary and years of service. Plans should consider providing a statement of cash flows when that statement would provide relevant information about the ability of the plan to pay benefits. For example, the plan invests in assets that are not highly liquid or obtains financing for investments.

Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. As contributions exceed obligation, it results in a prepayment of $400,000 to be reported on the statement of financial position. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.

However, the choice is impacted by the expected return (or discount rate) Sarah expects to receive on the $80,000 over the next 10 years. Using the discount rate of 7.40%, calculated above, the annuity payments are worth $68,955.33 when discounted back to the present, whereas the lump-sum payment today is $80,000. Since $80,000 is greater than $68,955.33, In this case, Sarah would take the lump-sum payment. When a defined-benefit plan is made up of pooled contributions from employers, unions, or other organizations, it is commonly referred to as a pension fund. Both types of plans allow the worker to defer tax on the retirement plan’s earnings until withdrawals begin. This tax treatment allows the employee to reinvest dividend income, interest income, and capital gains, all of which generate a much higher rate of return over the years before retirement.

The Types of Pension Costs

When the employee dies, the pension payout stops, but a large tax-free death benefit is paid out to the surviving spouse, which can be invested. When a pension plan provider decides to implement or modify the plan, the covered employees almost https://kelleysbookkeeping.com/ always receive credit for any qualifying work performed prior to the change. Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018.

Certain red flags may appear on financial statements of publicly traded companies that may indicate a business will not be a going concern in the future. Listing of long-term assets normally does not appear in a company’s quarterly statements or as a line item on balance sheets. Listing the value of long-term assets may indicate a company plans to sell these assets. The auditor will consider the adequacy of the disclosures made in the financial statements by management. The Material Uncertainty Related to Going Concern section will follow the Basis for Opinion paragraph and will cross-reference to the relevant disclosure in the financial statements. It will also state that the auditor’s opinion is not modified in respect of this matter.

• More specifically, companies are obligated to disclose the risks and potential events that could impede their ability to operate and cause them to undergo liquidation (i.e. be forced out of business).
• Going concern is an accounting term for a company that has the resources needed to continue operating indefinitely until it provides evidence to the contrary.
• Going concern is an example of conservatism where entities must take a less aggressive approach to financial reporting.
• A going concern, also known as a going concern assumption or going concern principle, is an accounting assumption stating that a business will stay in operation for the foreseeable future.

No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. Reddit isn’t currently publicly traded, but here’s what you should know if you’re interested in investing in it. The information contained herein is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities. Management’s assessment of going concern is in the spotlight because of COVID-19 and uncertainties involved.

Substantial doubt was raised but was alleviated by management’s plans (substantial doubt was alleviated)

This means management needs to run two sets of forecasts, before and after management’s plans, whereas IFRS Standards are not prescriptive in this regard. The effects of COVID-19 are negatively affecting many companies’ financial performance and liquidity in some way. Management will need to monitor the expected impacts on operations, forecasted cash flows, and debt covenants, with the primary focus being on whether the company will have sufficient liquidity to meet its financial obligations as they fall due.

• After all, I always wanted governments to take a step back and let the market decide which energy sources make the most sense – it’s why I own oil.
• The write-down process includes taking a loss on the income statement, so net income already doing badly will get even worse.
• Although bankruptcy isn’t imminent, its 10-Q going concern shows the problem it faces, as it will require external funding for many more years, which significantly raises the risks of share dilution and related value destruction.
• Impacts from a fall and winter COVID-19 surge may bring further uncertainty to many companies.
• Management must also identify the basis in which the financial statements are prepared and often disclose these financial reports with an audit report with a going concern opinion.

Asset-based approaches work well for corporations, as all assets are owned by the company and are included in the sale of the business. For sole proprietorships, however, this approach https://kelleysbookkeeping.com/ can be a more difficult means of evaluation. If any assets belong to or are in the name of the sole proprietor, separating the value of business assets from their personal assets.

Going Concern Assumption

Although US GAAP is more prescriptive than IFRS Standards, we would also expect under IFRS Standards that management plans are achievable and realistic, timely and sufficient to address the going concern uncertainties. For example, the look-forward period for a company with a December 31, 20X0 reporting date is at least the 12 months ended December 31, 20X1, but it may need to be extended depending on the facts and circumstances. For example, if the company expects to lose a major customer in 15 months from the reporting date, it may be necessary to extend the look-forward period up to at least March 31, 20X2.

Related AccountingTools Courses

This can protect investors from continuing to risk their money on a business that may not be viable for much longer. It is the responsibility of the business owner or leadership team to determine whether the business is able to continue in the foreseeable future. If it’s determined that the business is stable, financial statements https://bookkeeping-reviews.com/ are prepared using the going concern basis of accounting. In our experience, if there are such material uncertainties, then the company usually provides disclosure as part of the basis of preparation note in the financial statements. IFRS Standards do not prescribe how management performs the going concern assessment.

How Does the Going Concern Approach Impact Valuation?

This deal may well be the highest aggregate bid, or instead it could be the deal which offers the greatest amount of cash upfront rather than as part of an instalment plan. The eventual purchaser could be an unconnected third party, or a newco set up by the existing directors and shareholders. If there’s significant https://quick-bookkeeping.net/ evidence that a privately held business might not be viable under the going concern assumption, the auditor must disclose it in the audit report. Even if the business’s financials aren’t audited, an accountant who has concerns about the business’s viability should disclose those concerns to the business owner.

This term also refers to a company’s ability to make enough money to stay afloat or to avoid bankruptcy. If a business is not a going concern, it means it’s gone bankrupt and its assets were liquidated. As an example, many dot-coms are no longer going concern companies after the tech bust in the late 1990s. According to the company, as of September 30, 2023, Plug Power faces significant financial challenges, evident in an accumulated deficit of $3.8 billion and negative cash flows.

Subscribe to the IFRS® Perspectives Newsletter

This may not actually hurt the stock price that much since auditors usually will only make a negative going concern determination when there have been problems for a while. The going-concern value of a company is typically much higher than its liquidation value because it includes intangible assets and customer loyalty as well as any potential for future returns. The liquidation value of a company will even be lower than the value of the company’s tangible assets, because the company may have to sell off its tangible assets at a discount—often, a deep discount—in order to liquidate them before ceasing operations. Examples of tangible assets that might be sold at a loss include equipment, unsold inventory, real estate, vehicles, patents, and other intellectual property (IP), furniture, and fixtures. A business valuation is the process of determining the economic value of a business, giving owners an objective estimate of the value of their company. Typically, a business valuation happens when an owner is looking to sell all or a part of their business, or merge with another company.

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.