In other words, contra revenue is a deduction from gross revenue, which results in net revenue. CFI is the global institution behind the financial modeling and valuation analyst FMVA® Designation. CFI is on a mission to enable anyone to be a great financial analyst and have a great career path. In order to help you advance your career, CFI has compiled many resources to assist you along the path.
Contra Entry
Accurate records prevent overstatement of assets and revenues, thereby aiding in sound decision-making; imagine knowing exactly how much those accounts contra expense account examples receivable are truly worth, beyond optimistic estimations. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. 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.
What Are Examples of a Contra Asset Account?
Another description of a contra expense account is an account that reduces or offsets the amounts reported in another general ledger expense account(s). 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.
Tools and Resources for Contra Account Management
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What’s the Significance of a Contra Account in Business?
In bookkeeping, a contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit (negative) balance. The account offsets the balance in the respective asset account that it is paired with on the balance sheet. When a contra asset account is first recorded in a journal entry, the offset is to an expense.
- By creating the Sales Discount account, the company can provide context to their revenue figures and better understand trends in the marketplace.
- Stepping up your contra account management game is made easier with a host of tools and resources at your fingertips.
- This type of account could be called the allowance for doubtful accounts or a bad debt reserve.
- The accounts normally have a credit balance and in use are offset against the purchases account which is normally a debit balance.
For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance. Inscrutable Corporation offers long-term disability insurance to its employees under an arrangement in which it pays for the insurance, and then participating employees reimburse it for half of this cost. In the first month of the arrangement, the company pays the insurer $10,000, which Inscrutable records in a long-term disability insurance expense account. It then records $5,000 of contra expense against this account, which is derived from deductions taken from employee pay. Contra expense accounts are rarely used, because organizations find it to be easier to record third-party payments directly against an expense account.
Such accurate record-keeping is vital for maintaining the integrity of your financial reports. A debit will be made to 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. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. In the financial statements the purchases account would be offset against the contra expense accounts to show the net purchases.
