The following are examples of commonly-used contra asset accounts you could create to better understand your business financials. However, it’s important to keep in mind that you can create any contra account you want to more clearly describe your business — this is not an exhaustive or definitive list. Suppose Company A extends a two percent discount on the total amount for payments made within a week, deviating from the standard 30-day term. The company records the discounted portion in its contra account under Sales Discounts in this scenario. The contra revenue account reflects the original amount, the discounted sale, and the resulting net sales for the company.

• Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at Scale Venture Partners, focused on technology.
• Both the asset and the corresponding contra asset accounts must be stated clearly in the balance sheet.
• Because contra asset accounts are used so frequently, it’s worth spending a little bit more time on them here, including common subtypes.
• For example, this analysis might indicate that your business has product quality problems or servicing issues that can be corrected.
• At the same time, our Accounts Receivable Automation software and Accounts Payable Automation software makes tracking, managing, and processing crucial assets and liabilities — and their contras — easier than ever before.

What Is the Benefit of Using a Contra Account?

Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset. Each year of an asset’s life, another year of Depreciation Expense is recorded. The offset to the Depreciation Expense account is Accumulated Depreciation. 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. For example, an asset was purchased by a company for $100,000 – that is, the historical cost of the asset was $100,000 – and its contra asset counterpart has a balance of $30,000.

Example of Contra Revenue in Sales Discounts

This guide is also related to our articles on understanding gross vs. net profit, understanding prepaid expenses, and understanding unearned revenue. For industries that rely on natural resources — mining, logging, oil, gas — depletion tracks the gradual exhaustion of the raw material in question, offsetting that loss in value against the initial appraisal of the land. So an Accumulated Depletion account would serve as the contra for the parent Fixed Asset account. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.

Cash Flow Statement

• You can use contra accounts to record the goods your customers return, inventory that gets damaged, and equipment depreciation.
• When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value.
• Focusing on these areas can help your business not only survive, but thrive, in today’s competitive market.
• Note that the contra liability account has a positive balance (a debit balance), and the liability account normally has a credit balance.
• For example, an asset was purchased by a company for $100,000 – that is, the historical cost of the asset was $100,000 – and its contra asset counterpart has a balance of $30,000.
• Similarly, accumulated depreciation accounts reduce the value of the fixed assets you report on your financial statements.
• When the amount is material, the line item is typically presented separately on the balance sheet, below the liability account with which it is paired.

Examples of a contra revenue accounts include sales returns, sales discounts, and sales allowances. You debit the contra revenue accounts and credit the corresponding revenue accounts. For example, when you debit the balance in sales returns account, make sure that you offset the sales revenue account with a credit balance. To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts. Since it is a contra asset account, this allowance account must have a credit balance (which is contrary to the debit balances found in asset accounts).

Sales Discounts

• The main reason is to make the remaining shares more valuable, as their prices are expected to rise after the stock buyback.
• The most common contra equity account is called “treasury stock.” This special account decreases the number of shares outstanding in the market because the company repurchases some of the shares from its buyers.
• Contra accounts act like regular accounts on the balance sheet but have a unique purpose.
• A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet.
• 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.
• A liability that is recorded as a debit balance is used to decrease the balance of a liability.
• Make sure that you report contra accounts on the same financial statement as the related 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. Properly documenting these contra accounts in your ledger can sometimes feel counter-intuitive since they operate in an opposite manner from their parent accounts. Consider an asset account, where the values are listed as debits, and the account itself will present a positive total. Conversely, for a contra asset account like depreciation, you would list all entries as a credit, carrying a negative total balance for the overall account.

It is especially important to track sales returns separately and on a trend line, since this can provide important evidence of problems with a company’s products that are causing customers to return goods. In summary, the contra revenue account plays a crucial role in bookkeeping by mitigating unforeseen losses and clearly understanding a business’s financial landscape. 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. By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes.

How to Calculate Units of Activity or Units of Production Depreciation

In addition, you can examine the impact of sales discounts on increases in sales, to see if it makes sense to continue offering discounts in order to boost profits. 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.

However, some asset accounts need a negative counterpart to reduce the balance of that account. The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. With contra equity accounts, you reduce the number of outstanding shares you list on your company’s balance sheet. Treasury stock contra expense account and owner’s drawing account are examples of contra equity accounts. The discount on bonds payable amount shows the difference between the amount of cash received when issuing a bond and the value of the bond at maturity. The allowance method of accounting enables a company to determine the amount reasonable to be recorded in the contra account.