contra asset account

This discount is subtracted from the total amount borrowed to better reflect the discount given by the lender. The percentage of sales method assumes that a fixed percentage of goods or services sold by a company cannot be received. 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. A contra account is a general ledger account with a balance that is the opposite of another, related account that it is paired with. The contra account offsets the parent account to reveal the remaining net amount of non-current assets. In other words, contra revenue is a deduction from gross revenue, which results in net revenue.


Contra revenues account definition A revenues account with a debit balance instead of the usual credit balance. The purpose of a contra account is to accurately report value of operating performance and assets for a firm. A contra account is an account that records events like adjustments and transactions that are having an opposite effect on a relating account’s true value on the firm’s financial statements. If we record those events within the relating account, we risk losing information that is relevant to analyzing performance.

Contra Revenue Sales Discount Illustration

The projected bad debt expense is properly matched against the related sale, thereby providing a more accurate view of revenue and expenses for a specific period of time. In addition, this accounting process prevents the large swings in operating results when uncollectible accounts are written off directly as bad debt expenses. An allowance for doubtful accounts is considered a “contra asset,” because it reduces the amount of an asset, in this case the accounts receivable.

Most accounts receivable would just be the time between purchase and credit card settlement. Cash sales are sales in which the payment obligation of the buyer is settled at once. Cash sales are considered to include bills, coins, checks, credit cards, and money orders as forms of payment. A cash sale eliminates the need for the seller to extend credit to a customer.

However, others will separate them into two accounts for better presentation and processing. The contra revenue account is a reduction from gross revenue, which results in net revenue. These transactions are reported in one or more contra revenue accounts, which usually have a debit balance and reduce the total amount of the company’s net revenue. In the sales revenue section of an income statement, the sales returns and allowances account is subtracted from sales because these accounts have the opposite effect on net income. Therefore, sales returns and allowances is considered a contra‐revenue account, which normally has a debit balance. Examples include sales returns sales allowances and sales discounts.

Unlike the three previously mentioned investing activities include accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement. Contra revenue accounts typically offset revenue accounts in a firm’s income statement. A contra account is a negative account that is netted from the balance of another account on the balance sheet.

Types of Contra Accounts for Revenues

Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets. In case the CA account is not listed in the balance sheet, it must be listed in the footnotes of the financial statement for the users to be informed. Although they all aim at reducing the balance of some type of account, it is useful to have some general foundational knowledge of the different types of accounts. Note that in accounting, the term “book value” is also used interchangeably with net value. Therefore, the book value of an asset in the books is equal to its historical cost minus the related amount of contra asset in the balance sheet .

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Put simply, contra accounts are used to reduce the normal accounts on the balance sheet. If the related account has a debit as the natural balance, then the contra account will record a credit. 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.

What is a Sales Return?

If the amounts of these line items are minimal, they may be aggregated for reporting purposes into a single contra revenue line item. In the books, the account of the asset would have a debit value of $100,000, and the CA account would have a credit value of $30,000. If the asset account had a credit balance or the CA account had a debit balance, this would indicate an error in the journal entries. As mentioned, CA accounts usually have a negative value which is the same as a credit balance. 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.

In a sales returns and allowances contra revenue account you offset the balance in the sales revenue account. 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.


For example, the debit will be to the expense account in an estimated uncollectible amount from a credit sale. The credit will be to the asset account or allowance for doubtful accounts. Contra revenue accounts show the deducting adjustments to gross revenue or producing net revenue. Sales returned for a refund are posted to the contra account to reduce gross revenue or return on sales. The other side of the transaction is posted to cash because there is no value in retaining the sales transaction in the cash account.

Is the Matching Concept Related to the Cash Accounting or the Accrual Accounting for a Business?

To illustrate the contra revenue account Sales Returns and Allowances, let’s assume that Company K sells $100,000 of merchandise on credit. It will debit Accounts Receivable for $100,000 and credit to Sales for $100,000. If a customer returns $500 of this merchandise, Company K will debit Sales Returns and Allowances for $500 and will credit Accounts Receivable for $500. Company K’s income statement will report the gross Sales of $100,000 minus the sales returns and allowances of $500 and the resulting net sales of $99,500. In addition to sales returns, the most common contra revenues are sales discounts and sales allowances.

Cash sales are sales made in cash, or with credit cards, or by check. The opposite of sales on credit (sales made on account; shipments against invoices to be paid later). Cash deposited with bank is affect both cash and bank therefore, it is a contra entry. Answer – E – Accumulated depreciation is the only example provided that can be considered a contra account.

  • The contra account definition in business accounting is an account used in the general ledger for the purpose of reducing the amount in another account related to it.
  • Free Cash Flow The money left over after a company supports operations can be a snapshot of its financial health.
  • Contra accounts appear on the same financial statement as the related account.
  • $1,299, and $8,999 are almost certainly examples of prices that have been decided without any testing.

An entry which is made on both sides of a cash book is called Contra Entry. A checking account is a deposit account at a financial institution that allows for withdrawals and deposits of cash. A company receives rebates for advertising it does on behalf of brands it carries in its stores. For example, a grocery store displays advertisements for a national brand in its weekly flyer. The national brand gives the grocery store cash, reducing the overall cost of printing the flyer.

When the company pays the cost of having the flyer printed, a journal entry is done. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.

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If 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. The sales discounts contra revenue account records the discounts given to customers on sales made to them, normally a cash or settlement discount. The account is normally a debit balance and in use is offset against the revenue account which is normally a credit balance. Consequently the net balance of the two accounts shows the net value of the sales after discounts.

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. Sales discounts are recorded in a contra revenue account such as Sales Discounts. Hence, its debit balance will be one of the deductions from sales in order to report the amount of net sales. To oppose the revenue made by a company, contra revenue accounts must have a debit balance. However, some asset accounts need a negative counterpart to reduce the balance of that account.

gross revenue

If Company A offers a two percent discount on the total amount if paid within a week instead of the usual 30 days, the company records the discounted amount in its contra account as Sales Discounts. The company would see the original amount, discounted sale, and net sales in the contra revenue account. Sales Returns — A sales return is when customers send the product or item back to the seller.

Contra expense accounts are rarely used, because organizations find it to be easier to record third-party payments directly against an expense account. However, these accounts are still useful when dealing with large quantities of reimbursements, where it is cleaner and less confusing to store the information in a separate account. Thus, the use of a separate contra expense account makes it easier to monitor the flow of expenses and reimbursements. Accumulated depreciation is the total of all depreciation that has been charged to existing fixed assets such as equipment and buildings. There can be hidden value in stocks that have a lot of fully depreciated buildings.