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It is a type of internal transaction that does not appear in the income statement. As can be seen using the two accounts, allows information about the original sale to be maintained on the revenue account, and details of the sale returns to be maintained on the sales returns contra revenue account. In double entry bookkeeping terms, a contra revenue account or contra sales account refers to an account which is offset against a revenue account. Let’s consider a fictional example of a small retail business called “GadgetHub” to illustrate the use of a contra expense account in financial accounting. Of that amount, it is estimated that 1% of that amount will become bad debt at some point in the future.
- For example, GAAP accounting (or generally accepted accounting principles) requires fixed assets to be reported at cost on the balance sheet, but, over time, that value depreciates as the assets are used.
- For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately.
- However, some asset accounts need a negative counterpart to reduce the balance of that account.
- 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.
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. When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense.
Revenue or Contra Expense
You should never pick and choose which accounting principles to follow and which, based on your opinion, shouldn’t be followed. All the disclosure in the world can’t change the mis-application of an accounting principle. Should Company A record the $1,000 as revenue or as a reduction of expense? Obviously, there is a great deal of flexibility depending on how you “paper” the transaction, but interested in thoughts on a holistic level.
For instance, the company might debit its expense account 4210 Employee Health Insurance Expense when recording the insurance company’s invoice of $10,000. If the company withholds $2,000 from its employees’ wages to pay part of the cost of the insurance, the company will credit its contra expense account 4211 Employee Withholdings for Health Ins. Another description of a contra expense account is an account that reduces or offsets the amounts reported in another general ledger expense account(s). Revenue is the income generated by a business through the sale of goods or services. Contra expense, on the other hand, is an expense that is offset against income in the same accounting period.
Example of a Contra Account
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 contra expense 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. However, that $1.4 billion is used to reduce the balance of gross accounts receivable.
Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value. For example, GAAP accounting (or generally accepted accounting principles) requires fixed assets to be reported at cost on the balance sheet, but, over time, that value depreciates as the assets are used. The balance sheet will show a gross fixed assets value, a contra account value for accumulated depreciation, and a net value. All three values can be useful for investors depending on what they’re looking for.
What is the Difference Between a Contra Account and an Adjunct Account?
Contra accounts appear in the financial statements directly below their paired accounts. Sometimes the balances in the two accounts are merged for presentation purposes, so that only a net amount is presented. If the related account is an asset account, then a contra asset account is used to offset it with a credit balance.
- I’ve audited notes to financial statements, and I’ve consulted with partners at the largest auditing firm in the world on notes to the financial statements.
- As a principle IMHO it is wrong because most readers of financial statements (i.e., investors and creditors) never hear of, nor really care about EITF 01-14.
- Contra accounts appear in the financial statements directly below their paired accounts.
- The reimbursements from employees are recorded in a benefits contra expense account, which results in a reduced total benefits expense for the company.
- The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables.
I’m warning others, as strongly as I possibly can based on my expertise and experience, to not heed your advice when it comes to applying US GAAP accounting principles (which, by the way, ARE rules). In response to Wayne’s post, a positive margin is not a requirement for revenue recognition in any existing accounting literature. Actually, EITF specifically states that expense reimbursement related to providing services is to be presented as revenue, even if there is no margin. 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.
