These contra revenue accounts tend to have a debit balance and are used to calculate net sales. This type of account could be called the allowance for doubtful accounts or bad debt reserve. 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 amount is reported on the balance sheet in the asset section immediately below accounts receivable. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value.

If the company issues monthly financial statements, its income statement will report Insurance Expense which is one-sixth of the six-month premium. The balance in the account Prepaid Insurance will be the amount that is still prepaid as of the date of the balance sheet. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. They are expenses that are offset against revenue, reducing the total amount of income reported on a company’s financial statement. While revenue increases a company’s net income, contra expense reduces it. Furthermore, revenue is reported on the income statement while contra expense is not.

In the above method, we debit the contra revenue account in the trading account, but generally, the company uses the first method of accounting for contra revenue. This transaction records when a customer returns the paid goods, and a refund must be given. The December 5th journal entries record the original sale, and the December 12th entries record the return and exchange.

Allowance for doubtful accounts is a common contra asset listed on a company’s balance sheet under accounts receivable. When a company sells its products or services to customers on credit, the company records the amount sold in its accounts receivable account. Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns.

The discount on notes payable reduces the total amount of the note to reflect the discount given by the lender. In order to balance the journal entry, a debit will be made to the bad debt expense for $4,000. 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. Any unpaid bill or bad bet is the net accounts receivable, or the new total value of a company’s accounts receivable, when including the unpaid debt that is deemed to be uncollectible. Contra assets and contra liabilities are listed on a company’s balance sheet and carry balances opposite of their related accounts. Unlike regular assets and liabilities, contra assets typically keep a credit balance and contra liabilities typically keep a debit balance.

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The other side of the transaction is posted to cash because there is no value in retaining the sales transaction in the cash account. It also shows the carrying (net) amount of $19,000, which you report to your firm’s balance sheet. Allowance for doubtful accounts (ADA) is a contra asset account used to create an allowance for customers who are not expected to pay the money owed for purchased goods or services. In accounting terms, an expense is a cost incurred to produce revenue reported on the income statement.

• The dollar balance in the allowance for uncollectible acounts is the amount you don’t expect to collect, and this offsets the amount you report in accounts receivable.
• Discounts on notes receivable – Transactions shown here are based on the amount of money owed on liabilities like loans.
• The credit balance in the account Allowance for Doubtful Accounts tells us how much of the debit balance in Accounts Receivable is unlikely to be collected.
• A Contra Journal entries is a transaction that involves both a debit and a credit entry within the same accounting period, targeting different accounts.

Typically, a company fails to collect all of the money owed by customers making purchases on credit. The amount a company records as allowance for doubtful accounts is the amount from its accounts receivable the company considers uncollectible. Make sure that you report contra accounts on the same financial statement as the related accounts. If you’re the one managing your company’s books of accounts, be sure to report the contra account on your financial statement on the line item directly beneath the main account. The benefit of using the contra expense account is that the company’s managers can see in account 4210 the total amount that the company paid to the health insurance company. Then in account 4211 they can see the portion of the cost that was paid by the employees.

Definition of Contra Expense Account

The journal entry for cash withdrawn from a bank involves debiting the cash account and crediting the bank account. Contra Journal entries represent a unique class of accounting entries that involve simultaneous debiting and crediting of accounts within the same business entity. They are instrumental in capturing financial positions of internal transfers, adjustments, and movements of funds, ensuring that financial records remain accurate and aligned. The purpose of a contra expense account is to record a reduction in an expense without changing the balance in the main account. Contra expense accounts can be used to track expenses or income from other accounts in the general ledger.

What Are the Different Types of Contra Accounts?

The company’s income statement will report the combination of the amounts in accounts 4210 and 4211 in order to show the company’s actual expense of $8,000 ($10,000 minus $2,000). Typical business expenses include salaries, utilities, depreciation of capital assets, and interest expense for loans. The purchase of a capital asset such as a building or equipment is not an expense. Prepaid expenses aren’t included in the income statement per Generally Accepted Accounting Principles (GAAP). In particular, the GAAP matching principle, which requires accrual accounting.

What Is the Difference Between a Sales Return & a Sales Allowance?

Inventory is updated with the debit entry and the cost of goods sold is reduced with the credit. Many cars are sold on credit or account sale which means that the car payments will be made over time. A contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability.

Master accounting topics that pose a particular challenge to finance professionals. We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R). Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting.

A Contra Entry signifies the simultaneous recording of a debit and a credit entry that counteract each other’s effects, ensuring that the financial equation remains balanced. When the company pays the cost of having the flyer printed, a journal entry is done. Obsolete inventory reserves – This type of inventory counts as a loss for a business and includes any product that can no longer be sold or used because the product is defunct. Discounts on notes receivable – Transactions shown here are based on the amount of money owed on liabilities like loans. In other words, contra revenue is a deduction from gross revenue, which results in net revenue.

A company should have a policy not to return the goods sold and not provide sales rebates and discounts on products. The company should minus the sales return/allowance/discount from gross sales in the above case. A Cash DiscountCash discounts are direct incentives and discounts provided by any company to their customers in exchange what is overdraft in accounting for paying their bills on time or before the due date. The cost of goods sold (COGS) account will have a debit balance of $100,000, representing the initial cost of the inventory. The purchase discounts account will have a credit balance of $2,000 (2% of $100,000), which represents the discount received from the supplier.