How to Set up Contra Accounts
For example, if you bought a car for $10,000 seven years ago and you estimated a seven-year life on the vehicle. Now, the car is worth less than $1,000 and you continue to put more money into upkeep, maintenance, and insurance for the car than the value of the vehicle. Analyze sales patterns, customer behavior, and profitability metrics to inform your decisions. You don’t want to make policy changes based purely on intuition or sporadic feedback.
Asset Contra Account
The purpose of the Allowance for Doubtful Accounts is to track the reduction in the value of the asset while preserving the historical value of the asset. Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock. The main reason is to make the remaining shares more valuable, as their prices are expected to rise after the stock buyback. This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders. 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.
Examples of Contra Revenue Accounts
It’s normal for businesses to receive refund requests or returns from customers. The difference between an asset’s account balance and the contra account balance is known as the book value. The purpose of the Accumulated Depreciation account is to track the reduction in the value of the asset while preserving the historical cost of the asset.
Contra liability account example
Master accounting topics that pose a particular challenge to finance professionals. Still, the dollar amounts are separately contra expense account broken out in the supplementary sections most of the time for greater transparency in financial reporting.
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. There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Or, if the contra liability account balance is immaterial, the accounting staff could elect not to keep a balance in the account at all.
What is a Contra Expense 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. 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.
Example of Contra Revenue in Sales Discounts
- Now, the car is worth less than $1,000 and you continue to put more money into upkeep, maintenance, and insurance for the car than the value of the vehicle.
- 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.
- Refine your return policies to be clear yet reasonable, balancing customer flexibility with business protection.
- Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean.
- Contra accounts provide more detail to accounting figures and improve transparency in financial reporting.
- And by comparing these contras against their corresponding parent accounts, you can better understand the actual value of the assets retained by your business.
