Contra revenue is the difference between gross revenue and net revenue. A company creates allowances for doubtful accounts to record the portion of accounts 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. The purpose of contra-revenue accounts is to have adjusting entries for the corresponding revenue accounts. However, if the billing office stopped there, you would overstate your assets and net income. You must also report the amount that you can reasonably expect will not be paid, if it is estimable and probable.
Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value. The difference between an asset’s account balance and the contra account balance is known as the book value. The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount.
What is a contra account?
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. The amount in the accumulated depreciation account is deducted from the assets of a company, such as buildings, vehicles and equipment. This can help anyone viewing the financial information to find the historical cost of the asset. The accumulated depreciation amount shows how much depreciation expense has been charged against an asset.
- 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.
- This is done by separating the decreases that have occurred in the contra account from the original transaction amount.
- All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
- The company would see the original amount, discounted sale, and net sales in the contra revenue account.
If your company has minimal contra revenue activity, it is acceptable to record these transactions within the revenue account. Home Depot reports net receivables and net property and equipment, implying that both are reduced by contra assets. We’ll need to dig into the footnotes to find out what the contra accounts are.
What is the purpose of contra-revenue accounts? Also, give two examples of contra-revenue…
Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period. Contra liabilities are common in companies that sell bonds to raise capital. To drum up interest in the bond, the company will sell it at a discount. For example, a bond with a principal amount of $1,000 may be sold for only $950. The bond is listed on the balance sheet at the full amount of $1,000, but the cash received is just $950, so a contra liability for the discount is listed to make the entry balance.
- Contra asset examples can be accumulated depreciation, discounts on notes receivable, trade accounts receivable, and obsolete inventory reserves.
- In the example of Homes Inc. the percentage of customers defaulting on the account, and the amount defaulted, is estimable and probable.
- In footnote 3, the company reports, “Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021.”
- The amount is not reported, and the net sales amount is reported on the income statement.
- This type of account could be called the allowance for doubtful accounts or bad debt reserve.
- The amount in the accumulated depreciation account is deducted from the assets of a company, such as buildings, vehicles and equipment.
Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount. For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.
Depreciation Expense Account Vs. Allowance for a Depreciation Account
Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical https://accounting-services.net/contra-revenue-account-definition/ costs, which can make tax preparation more difficult and time-consuming. Again, the company’s management will see the original amount of sales, the sales discounts, and the resulting net sales.
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Contra Liability a/c is not used as frequently as contra asset accounts. It is not classified as a liability since it does not represent a future obligation. The purpose of a contra account is to accurately report value of operating performance and assets for a firm.
Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. At Zeni, we keep it simple for you to record all of your contra revenue in one dedicated place and view the changes to your accounts over time AND in real-time. Our AI-powered tool gives you daily access to your company’s finances while our expert finance team double-checks the numbers every step of the way.
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When researching companies, the financial statement is a great place to start. Contra accounts are confusing at first, but, with a little study, understanding them becomes second nature. Let’s go over how they work and what the main types are, and then finish with an example.
