So, you need to debit these accounts and credit the corresponding account, like Accounts Receivables. Record incoming money from main business operations in your Revenues/Sales account. For example, Service Revenue is a type of account that records sales from services you perform.
- Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset’s net value or book value.
- Contra equity reduces the total number of outstanding shares on the balance sheet.
- For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account.
- The amount is reported on the balance sheet in the asset section immediately below accounts receivable.
A Fixed Asset is a Long-term Asset used by a company to create revenue. Each year of an asset’s life, another year of Depreciation Expense is recorded. The offset to the Depreciation Expense account is Accumulated Depreciation. You will need to debit the contra revenue account and credit the Accounts Receivable account. You might have a sales return contra account or a sales discounts account.
Contra Account – Definition, Examples, Types and Importance
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 account always offsets the balance of a corresponding account. Any entry made to contra accounts is presented on a company’s balance sheet under the paired account. Contra liability accounts are special accounts in the liabilities section of the balance sheet. This would let users of the financial statements calculate the book value of the liability.
As mentioned, businesses use contra revenue accounts to understand net vs. gross revenue. The transactions are sometimes recorded in one or more accounts, but the balance is usually a debit. To determine the contra revenue, you simply deduct the gross sales from the net sales. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Accumulated depreciation reflects the reduction in value of a fixed asset. The amount of gross revenue minus the amount recorded in the contra revenue accounts equals a company’s net revenue.
Contra Asset Account
Now, the car is worth less than $1,000 and you continue to put more money into upkeep, maintenance, and insurance for the car than the value of the vehicle. QuickBooks Online has different interphase and features compared to QuickBooks Desktop. Moving forward, follow the steps below for the complete process of an account set up in the QuickBooks Desktop version. I’d love to show you the way and set up an account in QuickBooks Desktop, @khatfieldcpa. For more details about this one, I would recommend consulting your accountant and getting further assistance from them. This is to ensure that everything is accurate, and the reporting of your book is moving well.
The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. The amount is reported on the balance sheet in the asset section immediately below accounts receivable. The net of these two figures is typically reported on a third line. Again, the company’s management will see the original amount of sales, the sales discounts, and the resulting net sales. The contra accounts in the balance sheet help the users of the financial statement to get complete information.
Examples of Contra Accounts
Now that you have understood the contra account definition, you can summarize that contra account will always have a credit balance which will offset with paired asset account. In simpler words, contra account always has a negative balance to offset with paired asset account and shows the net balance of asset account in the balance sheet. For you to represent these details in the balance sheet, you need a contra account. Only by using this account, you can offset the respective asset account that it is paired in the balance sheet. In the above example, accumulated depreciation is a contra account of machinery. Of that amount, it is estimated that 1% of that amount will become bad debt at some point in the future.
The December 5th journal entries record the original sale, and the December 12th entries record the return and exchange. Inventory is updated with the debit entry and the cost of goods sold is reduced with the credit. The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount. 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.
What is a contra account?
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. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. Both ways of accounting will have the same impact but the later one will give you more information such as purchases cost of machinery; how much depreciation is written off etc.
- Home Depot reports net receivables and net property and equipment, implying that both are reduced by contra assets.
- Once you earn the revenue, you can reduce your Unearned Rent Revenue account and increase your Rent Revenue account.
- If you have investments that earn interest, you will need to create an Interest Revenue account.
- Revenue is an income statement account, but it flows through to the equity section of retained earnings as well.
- In simpler words, contra account always has a negative balance to offset with paired asset account and shows the net balance of asset account in the balance sheet.
An item on one side of an account which offsets fully or in part on the opposite side of the same account is technically referred to as contra account. The information provided by my colleague above is to set up an account within QuickBooks Online (QBO). In regards to your concern, the Accumulated Depreciation will not automatically set as a contra account in QBO.
How to Calculate Units of Activity or Units of Production Depreciation
That is to completely or partially offset the balance of their related asset accounts. Asset accounts usually have a positive value which is the same as a debit balance. For example, when a line item on your balance sheet presents the balance of accounts receivable, https://accounting-services.net/what-is-a-valuation-account/ report the value of allowance of uncollectible accounts below the accounts receivable line. Be sure to enter the contra account on the opposite column of the account they’re offsetting. If contra assets appear in the credit column, record contra liabilities on side.
- Accounting contra asset accounts or contra revenue accounts follow a simple double-accounting procedure to eliminate errors in financial reporting.
- Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock.
- As mentioned, contra asset accounts are usually listed below their matching asset accounts, and the net values of those assets are written next to the contra accounts.
- A contra account balances the numbers from two or more accounts that are compared on the balance sheet.