Accounting Definitions of Contra-Revenues vs Expenses Chron.com

Contra accounts such as these have a debit balance and are deducted from the total amount of a company’s revenue. Contra liability accounts are less commonly used than contra asset accounts. Contra liability accounts are mainly used by corporations that issue bonds frequently. That is because some of the bonds are issued at a discount, so this reduces the balance of their bonds payable.

• He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.
• You’ve just converted $20 worth of cash into $20 worth of shoes; an asset that remains in your inventory.
• A contra account offsets the balance in another, related account with which it is paired.
• Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000.
• In case a customer returns a product, the company will record the financial activity under the sales return 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. Contra account is important as it not only allows a company to report the original amount of a transaction but also report any reductions that may have happened so that the net amount will also be reported. They are useful in preserving the historical value in the main account while presenting a write-down or decrease in a separate contra account that nets to the current book value. Contra accounts serve an invaluable function in financial reporting that enhances transparency in accounting books. 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.

Accounting Definitions of Contra-Revenues vs. Expenses

Accounting is how we tell a story about an economic event or financial transaction, such as a purchase or a withdrawal of money, for example. Periodic financial statements report the impact of the story and are used by leaders of a firm or industry to analyze performance, plan, and respond. At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset. Sometimes, it is important to keep the original balance of the accounts and create the contra accounts to be able to calculate the net value of the account. 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.

However, that $1.4 billion is used to reduce the balance of gross accounts receivable. Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount. For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account.

Contra Account Definition in Accounting

The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Go a level deeper with us contra revenue and investigate the potential impacts of climate change on investments like your retirement account. The furniture is delivered on December 12th and, as the technicians are setting it up, they realize there is not enough space in the bedroom for the entire set with the queen bed.

The allowance method of accounting enables a company to determine the amount reasonable to be recorded in the contra account. Some accountants will keep a reference handy to know if the debit increases or the credit increases an account. The normal balance of a contra account, and the debit or credit, will be the opposite of the entry and normal balance in the parent account. Many cars are sold on credit or account sale which means that the car payments will be made over time. Car sales are typically under warranty for a set period of time and can be returned as a return on sales later on.

Example of a Contra Account

Accounting contra asset accounts or contra revenue accounts follow a simple double-accounting procedure to eliminate errors in financial reporting. The most common way to account for contra accounts is to attach the regular account with its connected contra account underneath it on a company’s balance sheet. For example, the depreciation value will be listed underneath the value of a vehicle, or the allowance of bad debts will be attached to the accounts receivable. Another example could be when a product is bought and is returned at face value because of a defect. The contra return on sales account will be debited while the normal cash account will be credited. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation.

• A company creates allowances for doubtful accounts to record the portion of accounts receivable which it believes it will no longer be able to collect.
• A contra account balances the numbers from two or more accounts that are compared on the balance sheet.
• Contra liability accounts such as discount on bonds payable and discount on notes payable usually carry debit balances.
• You could simply adjust the parent account…but then you are missing an essential part of the story — how many patients were actually treated today for a sprain.
• If you buy a pair of shoes from your supplier for $20, that’s a cost, but it’s not yet an expense.

The balance sheet impact includes the remaining account receivable after returns and the estimated uncollectible. Let’s consider a fictional example of a small clothing retail business called “StyleMart” to illustrate the use of contra revenue accounts in financial accounting. Allowance for doubtful accounts (ADA) is a contra asset account used to create an allowance for customers who are not expected to pay the money owed for purchased goods or services. The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables. Home Depot reports net receivables and net property and equipment, implying that both are reduced by contra assets.