What is a contra expense account?

If a reduction or rebate occurs, a credit is made to the contra expense account, which offsets the original expense. This method ensures that the financial statements reflect the net expense, rather than the gross amount, providing a more precise financial picture. Contra expense accounts come in various forms, each serving a unique purpose in financial accounting. When a company returns goods to a supplier due to defects or other issues, the value of these returns is recorded in this account. This action reduces the total cost of goods purchased, ensuring that the expense reported on the financial statements reflects only the net cost of goods that were actually retained and used by the company. The presence of contra expense accounts significantly influences the presentation and interpretation of financial statements.

What are the Five Types of Contra Accounts?

So, a contra asset account has a credit balance because the normal asset typically has a debit balance. A contra revenue account’s typical balance is debit because the normal revenue account has a credit balance. Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance. The contra liability account is less common than the contra asset account. An example of a contra liability account is the bond discount account, which offsets the bond payable account. A contra liability account is not classified as a liability, since it does not represent a future obligation.

What is a Contra Account? Definition

Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities includes discounts on notes or bonds payable. 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 the Difference Between a Contra Account and an Adjunct Account?

Offsetting the asset account with its respective contra asset account shows the net balance of that asset. A company might decide to purchase its stock when the board of directors feel the stock is undervalued or when it wishes to pay its shareholders dividends. The amount on the equity contra account is deducted from the value of the total number of outstanding shares listed on a company’s balance sheet. Contra account is important as it not only allows a company to report the original amount of a transaction but also report any reductions that may have happened so that the net amount will also be reported.

• The mechanics of contra expense accounts involve debits and credits, similar to other accounts in double-entry bookkeeping.
• The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible.
• The allowance method of accounting enables a company to determine the amount reasonable to be recorded in the contra account.
• Of that amount, it is estimated that 1% of that amount will become bad debt at some point in the future.
• Purchase returns, allowances and discounts are all examples of contra expense accounts.
• It is because clubbing together dissimilar transactions impedes any analysis.

Presentation of Contra Accounts

The amount due from the customer has been posted to the accounts receivable ledger, whereas the amount due to the supplier is posted to the accounts payable ledger. Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University. Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees. We strive to empower readers with the most factual and reliable climate finance information possible to help them make informed decisions.

Why should one include contra accounts on a balance sheet?

Bills payable or notes payable is a liability that is created when a company borrows any specific amount of money. This discount is subtracted from the total amount borrowed to better reflect the discount given by the lender. A company creates allowances for doubtful accounts to record the portion of accounts contra expense receivable which it believes it will no longer be able to collect. The amount in allowance for doubtful accounts is deducted from the accounts receivable account of a company. A contra account is also known as a valuation allowance, because it adjusts the carrying value of the account with which it is paired.

• Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.
• This is done to entice customers to keep products instead of returning them.
• Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset.
• Contra accounts are more commonly paired with asset accounts, such as accounts receivable or inventory, to reduce the carrying values of those assets.
• This depreciation is saved in a contra asset account called accumulated depreciation.

Impact on Financial Statements

The Allowance for Doubtful Accounts is used to track the estimated bad debts a company my incur without impacting the balance in its related account, Accounts Receivable. An estimate of bad debts is made to ensure the balance in the Accounts Receivable account represents the real value of the account. Allowance for Doubtful Accounts pairs https://www.bookstime.com/articles/accounting-for-churches with the Bad Debts Expense account when doing adjusting journal entries. An expense account which is expected to have a credit balance instead of the typical debitbalance. 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.

This means that the $85,000 balance is overstated compared to its real value. At this point, it isn’t known which accounts will become uncollectible so the Accounts Receivable balance isn’t adjusted. Instead, an adjusting journal entry is done to record the estimated amount of bad debt. The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline.

• Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.
• One other type of account is the contra account and for accountants, this is a must-know.
• Instead, it is reported at its full amount with an allowance for bad debts listed below it.
• When the balance in the accumulated depreciation is $10,000 and your equipment account has a debit balance of $50,000, then the book value of your equipment is $40,000.
• Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance.
• Contra expense accounts have a natural credit balance, as opposed to the natural debit balance of a typical expense account.

We will define what contra accounts are, the types of contra accounts and provide examples to illustrate. Accruing tax liabilities in accounting involves recognizing and recording taxes that a company owes but has not yet paid. The difference between an asset’s account balance and the contra account balance is known as the book value.

• The concepts of debits and credits in accounting dictate how transactions are recorded.
• The difference between an asset’s account balance and the contra account balance is known as the book value.
• For example, if a company returns defective goods to a supplier, the value of the returned goods is credited to a purchase returns and allowances account, a type of contra expense account.
• The contra accounts will be grouped in the same category on the balance sheet or income statement as their related accounts.
• When the company pays the cost of having the flyer printed, a journal entry is done.
• It is not classified as a liability since it does not represent a future obligation.