Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra revenue accounts reduce revenue accounts and have a debit balance. Contra accounts are more commonly paired with asset accounts, such as accounts receivable or inventory, to reduce the carrying values of those assets.
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A copy of 11 Financial’s current written disclosure statement discussing 11 Financial’s business operations, services, and contra expense account fees is available at the SEC’s investment adviser public information website – from 11 Financial upon written request.
What are the Different Types of Contra Accounts?
Typically, these notes reflect purchases made on credit by your customers. To obtain a cash payout before the note reaches maturity, you can sell these notes to a bank or other financial institution for some price below the note’s face value. This price gap — or discount — would then be recorded in a Discount on Notes Receivable account, and when the total of this contra account is combined with the parent account, you’ll be able to determine the net value of any outstanding notes. The following are examples of commonly-used contra asset accounts you could create to better understand your business financials. However, it’s important to keep in mind that you can create any contra account you want to more clearly describe your business — this is not an exhaustive or definitive list. For the recent year, the company had gross sales of $510,000 and had sales discounts of $4,000 and sales returns and allowance of $5,000.
How to Set up Contra Accounts
In essence, contra accounts allow you to report your firm’s gross and net amounts. These accounts also ensure that you follow the matching principle in accounting, which states that you record expenses in the same period you incur them. Sales Discounts is a contra revenue account that records the value of price reductions granted to buyers in order to incentivize early payments. Examples include Net D cash discounts like 2/30 Net 60, where a full invoice payment is due in 60 days but a buyer will receive a 2% discount in case of an early settlement within 30 days.
- Sales Returns contra revenue account records the value of a sales deduction attributable to goods returned by buyers in exchange for a refund.
- The net Revenue balance on an income statement is calculated as gross Revenue minus all contra-revenue items like Sales Returns, Allowances and Discounts.
- Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements.
- Accumulated depreciation tallies the depreciation to date of a fixed asset, such as a car or a building.
- The sooner a company receives cash after providing a good or service, the better off it is financially.
- The downside of offering a discount is that the business now has an extra cost.
Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value. When the amount recorded in the contra revenue accounts is subtracted from the amount of gross revenue, it equals the net revenue of a company. In case a customer returns a product, the company will record the financial activity under the sales return account. The use of contra accounts ensures the accuracy of financial accounting records, as the value of the original accounts is not directly reduced.
If contra assets appear in the credit column, record contra liabilities on side. The main advantage of using separate contra revenue accounts is that each one provides targeted information about the individual deductions taken from sales. Since each of these deductions directly reduces your profits, it makes sense to research them in detail, to see if there are any actions that can be taken to reduce the number of deductions. For example, this analysis might indicate that your business has product quality problems or servicing issues that can be corrected.
Presentation of Sales Discounts
In regards to your concern, the Accumulated Depreciation will not automatically set as a contra account in QBO. We still have to manually set up and track on how much we depreciate a fixed asset into this account. You would debit $50,000 as Accounts Receivable and credit $50,000 as Sales.
Examples of contra assets include Accumulated Depreciation and Allowance for Doubtful Accounts. Unlike an asset which has a normal debit balance, a contra asset has a normal credit balance because it works opposite of the main account. Sales discounts do not reduce any assets or liabilities, only revenue which reduces net income. To oppose the revenue made by a company, contra revenue accounts must have a debit balance.
A contra account is also known as a valuation allowance, because it adjusts the carrying value of the account with which it is paired. 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.