How to Set up Contra Accounts

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. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. Taking the example of CCC again, the company has $50,000 in accounts receivable at year-end of December 31.

The offset to the Depreciation Expense account is Accumulated Depreciation. A contra revenue account allows a company to see the original amount sold and to also see the items that reduced the sales to the amount of net sales. For instance, if a company buys back its own shares, it records the transaction in the Treasury stock account to reflect the reduction in shareholder’s equity. A contra account provides missing context by pairing it with a related account. So as values shift depending on real-world factors, rather than making deductions or adjustments to the original or “parent” account, you would record these changes in the contra account instead. By viewing these accounts — the parent and contra — in tandem, business owners can gain broader insights, preserve the historical figures stored in the parent account, and make accommodations for any relevant changes.

Contra revenue definition

In order to record this ongoing value drop, you would use a corresponding contra account — an Asset Depreciation account. 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. A doubtful debts contra account allows for future write-offs of accounts receivable. Although you have not officially written off these debts yet, you show them to be a negative balance because you don’t believe the customer will pay you.

• Contra equity reduces the total number of outstanding shares on the balance sheet.
• The difference between an asset’s account balance and the contra account balance is known as the book value.
• In order to keep the accounts receivables as clean as possible with their historical values, we will use this contra account called allowance for doubtful accounts.
• By recording the offset in a separate contra account, accountants can see how much of the value in the main account has been offset.

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. Showing contra assets on your balance sheet allows potential investors to see how you write-down a depreciable asset, such as a piece of equipment. Contra assets give investors a better picture of how you use your assets over time.

Contra Account

The use of contra accounts ensures the accuracy of financial accounting records, as the value of the original accounts is not directly reduced. In the event that a contra account is not utilized, it can become increasingly troublesome to determine historical costs, which makes tax preparation time-consuming and difficult. The balance in the allowance for doubtful accounts is used to find out the dollar value of the current accounts receivable balance that is deemed uncollectible. Contra accounts are more commonly paired with asset accounts, such as accounts receivable or inventory, to reduce the carrying values of those assets.

List of Contra Accounts

Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value. When the amount recorded in the contra revenue accounts is subtracted from the individual income tax forms amount of gross revenue, it equals the net revenue of a company. In case a customer returns a product, the company will record the financial activity under the sales return account.

When purchasing or updating funds, the entrepreneur makes capital expenditures …. The purpose of the Sales Returns account is to track the reduction in the value of the revenue while preserving the original amount of sales revenue. 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. A delivery van is purchased by a business to use in delivering product and picking up materials. The company uses Straight-Line Depreciation to track the loss of value of the asset over time. In short, in the example above it is distinguishable that the drawing account is reducing the balance of the equity account.

When the original dollar amount is kept in the original account and a separate account is used for recording the deduction, the resulting financial information becomes more transparent and helpful for stakeholders. For example, a building is acquired for $20,000, that $20,000 is recorded on the general ledger while the depreciation of the building is recorded separately. Get instant access to video lessons taught by experienced investment bankers. A contra account is an account used in a general ledger to reduce the value of a related account when the two are netted together.

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Our goal is to deliver the most understandable and comprehensive explanations of climate and finance topics. Carbon Collective is the first online investment advisor 100% focused on solving climate change. We believe that sustainable investing is not just an important climate solution, but a smart way to invest. Contra accounts help provide more accurate financial information by separating certain items and highlighting their impact on the overall financial position. A contra account is used to show the opposite effect or reduction of a related account.

What is a Contra Account? Definition

Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods. In this scenario, a write-down is recorded to the reserve for obsolete inventory. In its general ledger, the business will want to capture its gross sales figures and the actual value of the discount. 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. However, that $1.4 billion is used to reduce the balance of gross accounts receivable.

What is a contra revenue account?

There are four types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. By using contra revenue accounts, financial statement users can gain a more accurate and detailed understanding of a company’s revenue position, allowing for better financial analysis and decision-making. Contra revenue accounts help in presenting the net revenue, which is the revenue earned by the company after accounting for any returns, allowances, and discounts. With contra equity accounts, you reduce the number of outstanding shares you list on your company’s balance sheet.