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The net effect of the two accounts is a reduced total benefits expense for the company. In addition to sales returns, the most common contra revenues are sales discounts and sales allowances. A “discount,” in accounting terms, usually refers to a price reduction offered as an inducement to customers who pay their bills quickly, not to a “sale” price, which is simply incorporated into gross revenue. Sales allowances are price reductions offered to persuade customers to accept merchandise with damage or minor defects not serious enough to warrant a return. 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.

Do Contra Accounts Have Debit or Credit Balances?

Therefore, a contra asset can be regarded as a negative asset account. Offsetting the asset account with its respective contra asset account shows the net balance of that asset. If you’re still using manual accounting systems, you’ll need to do a bit more work by recording your accumulated depreciation expense in your general ledger while also reporting it on your balance sheet as a contra asset account. Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance.

How are Contra Accounts Used and Reported?

Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable. They are used in case some customers won’t be able to pay the money they owe to the business. Inventory obsolescence is an expense account, while the allowance for obsolete inventory is a contra asset account, which aims to reduce the inventory valuation on your balance sheet. Accounts receivable is rarely reported on the balance sheet at its net amount.

What is a Contra Revenue Account?

Assume that a company uses a contra expense account to record the amounts that employees paid toward the company’s health insurance costs. For instance, the company might debit its expense account 4210 Employee Health Insurance Expense when recording the insurance company’s invoice of $10,000. If the company withholds $2,000 from its employees’ wages to pay https://accounting-services.net/ part of the cost of the insurance, the company will credit its contra expense account 4211 Employee Withholdings for Health Ins. Contra expense accounts have a natural credit balance, as opposed to the natural debit balance of a typical expense account. Therefore, a contra expense account that contains a debit balance must have a negative ending balance.

1. The difference between the gross balance of a main account and its contra accounts reported as the net balance in a company’s financial statements is also referred to as a book value, current value, carrying value, or net realizable value.
2. In the financial statements the purchases account would be offset against the contra expense accounts to show the net purchases.
3. Contra asset accounts can be used in a variety of areas, but there are three contra asset examples that you should pay close attention to.

Closing Entries, Sales, Sales Returns & Allowances in Accounting

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. Interim housing is this missing rung on the ladder toward permanent housing. It lifts unsheltered homeless individuals off the streets and into temporary residences to help them transition into stable housing. These residences could include tiny homes, hotel rooms or other types of housing.

How to Calculate Units of Activity or Units of Production Depreciation

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. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. For example, if the balance of accumulated depreciation increases from $20,000 to $50,000, this means that the depreciation expense amounts to $30,000, which will be listed in the income statement.

Advantages of Contra Revenue

The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable. Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000. A liability that is recorded as a debit balance is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as contra asset accounts.

Accumulated depreciation reflects the reduction in value of a fixed asset. A contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability. Contra revenue is a deduction from the gross revenue reported by a business, which results in net revenue. These deductions are a common part of doing business, especially if you are trying to retain customers by offering them discounts from the list prices of your goods and services. Contra revenue transactions are recorded in one or more contra revenue accounts, which usually have a debit balance (as opposed to the credit balance in the typical revenue account). There are three commonly used contra revenue accounts, which are noted below.

You may not need to use contra asset accounts right now, but as your business grows, using contra asset accounts will likely become a necessity. Writing off your obsolete inventory in this manner allows you to expense the cost of the obsolete inventory while also decreasing your current inventory balance using the contra asset account. For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming. In double entry bookkeeping terms, a contra expense account refers to an account which is offset against an expense account.

Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete. Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods. In this scenario, a write-down is recorded to the reserve for obsolete inventory. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. The accumulated depreciation account is perhaps the most common contra asset account used by business owners.

Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities difference between project and assignment includes discounts on notes or bonds payable. Contra liability accounts are not as popular as contra asset accounts. Contra asset accounts include allowance for doubtful accounts and the accumulated depreciation.

This prime example shows how easily cities can implement interim housing and positively impact homeless individuals and local communities. Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens”publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa. 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.