Contra Account Definition, Types, and Example

These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount. A debit will be made to Contra Expense Account the bad debt expense for $4,000 to balance the journal entry. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month.

Do Sales Returns & Allowances Go on the Income Statement?

A contra expense account is a general ledger expense account that will intentionally have a credit balance (instead of the debit balance that is typical for an expense account). In other words, this account’s credit balance is contrary to (or opposite of) the usual debit balance for an expense account. For example, if your business has accounts receivable of $50,000 and an allowance for doubtful debts account totalling $5,000, the net accounts receivable is $45,000. In this way, a contra asset (credit) lowers the overall value of your accounts receivables (debit) on the balance sheet. The two most common contra accounts on a balance are accumulated depreciation and the allowance for doubtful debts. Accumulated depreciation tallies the depreciation to date of a fixed asset, such as a car or a building.

Example of Contra Expense Account

When the two balances are offset against each other they show the net balance of both accounts. For example, suppose a business has an amount of 1,000 owed by a customer for services provided on account, but also has an amount of 200 due to a supplier (in this case the customers business) for goods it has purchased. When the company pays the cost of having the flyer printed, a journal entry is done. The purpose of the Owner’s Withdrawal account is to track the amounts taken out of the business without impacting the balance of the original equity account.

• It also shows the carrying (net) amount of $19,000, which you report to your firm’s 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.
• When a contra asset account is first recorded in a journal entry, the offset is to an expense.
• Occasionally a business has cause to offset an amount owed by a customer (accounts receivable) with an amount owed to a supplier (accounts payable).
• 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.
• Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean.

Contra revenue accounts

Discount on Notes Receivable is a contra asset account with a credit balance that reduces the normal debit balance of its parent Notes Receivable asset account in order to present the net value of receivables on a company’s balance sheet. Purchase returns, allowances and discounts are all examples of contra expense accounts. The accounts normally have a credit balance and in use are offset against the purchases account which is normally a debit balance.

Contra Account Example: Allowance for Doubtful Accounts

• When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value.
• Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a creditbalance.
• A contra asset is paired with an asset account to reduce the value of the account without changing the historical value of the asset.
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• Business expenses paid out of a nonaccountable plan are deductible from the employee’s taxable income only as miscellaneous itemized deductions, and even then, they are only deductible if the expenses are equal to or greater than 2% of the employee’s income.

The contra account will be a sub account of the expense account, and I will be manually entering the correcting journal entries. I’ll have to do it this way because the reimbursements were originally mis-catagorized as income, which violates GAAP. QB itself isn’t set up to handle something like this on its own, so manual entries is the only way I know of to take care of it. I strongly suggest having a trained Accountant do this (or something in a similar vein) if you need it done for your business. The revenue contra accounts Sales Returns, Discounts and Allowances are subtracted from the main Sales Revenue account to present the net balance on a company’s income statement. Another description of a contra expense account is an account that reduces or offsets the amounts reported in another general ledger expense account(s).

What is a Contra Liability?

Examples of contra assets include Accumulated Depreciation and Allowance for Doubtful Accounts. Unlike an asset which has a normal debit balance, a contra asset has a normal credit balance because it works opposite of the main account. 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 Liability a/c is not used as frequently as contra asset accounts.

• Simply hit Control + N under the Chart of Accounts or Edit, then click New (to create a new account).
• For example, a grocery store displays advertisements for a national brand in its weekly flyer.
• If the company withholds $2,000 from its employees’ wages to pay part of the cost of the insurance, the company will credit its contra expense account 4211 Employee Withholdings for Health Ins.
• Assume that a company uses a contra expense account to record the amounts that employees paid toward the company’s health insurance costs.
• 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.
• Contra equity reduces the total number of outstanding shares on the balance sheet.

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. 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. The following are examples of contra expense accounts used in double entry bookkeeping. In this example, the contra expense account (Purchase Discounts) is used to provide a more accurate and detailed representation of the company’s expenses, allowing for better financial analysis and decision-making.

What Is the Difference Between Net Revenue, Net Sales, Cost of Sales & Gross Margin?

• Discount on Bonds Payable is a contra liability account with a debit balance that reduces the normal credit balance of its parent Bonds Payable liability account in order to present the net value of payables on a company’s balance sheet.
• Accumulated Depreciation is a contra asset account with a credit balance that reduces the normal debit balance of Property, Plant and Equipment fixed assets in order to present the net value of long-term capital assets on a company’s balance sheet.
• Cam Merritt is a writer and editor specializing in business, personal finance and home design.
• The contra asset account of your equipment account is the accumulated depreciation of equipment.