Another common contra liability account is a Discount on Bonds Payable account used by businesses that issue their own bonds. A contra asset account is an asset account where the account balance is a credit balance. It is described as “contra” because having a credit balance in an asset account is contrary to the normal or expected debit balance. (A debit balance in a contra asset account will violate the cost principle.) Learn more about contra asset accounts.
The Contra Liability Account
Are you looking for a way to account for accumulated depreciation, returned merchandise, or damaged inventory? You can use contra accounts to record the goods your customers return, inventory that gets damaged, and equipment depreciation. In an accounting system, ledger accounts are designed to contain only similar transactions and/or balances. For example, we need separate accounts to hold the actual cost of property, plant and equipment (PPE) and related accumulated depreciation.
- The amount is not reported, and the net sales amount is reported on the income statement.
- Discount on notes payable and discount on bonds are examples of contra liability accounts.
- The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable.
- Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.
- Contra accounts are more commonly paired with asset accounts, such as accounts receivable or inventory, to reduce the carrying values of those assets.
What Is a Contra Account?
Accounts receivable is rarely reported on the balance sheet at its net amount. Instead, it is reported at its full amount with an allowance for bad debts listed below it. Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off.
- It is described as “contra” because having a credit balance in an asset account is contrary to the normal or expected debit balance.
- The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment.
- The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount.
- The debit balances in the above accounts are amortized or allocated to an expense, such as Interest Expense over the life of the bonds or notes payable.
- A contra account is also known as a valuation allowance, because it adjusts the carrying value of the account with which it is paired.
- Are you looking for a way to account for accumulated depreciation, returned merchandise, or damaged inventory?
- Although you have not officially written off these debts yet, you show them to be a negative balance because you don’t believe the customer will pay you.
Sales returns
When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes. 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. Consider a business that offers an early payment discount to its customers, cutting their invoiced total by 3% if they pay within 1 week of invoicing. If every single buyer had taken advantage of the early payment discount, the company would have provided roughly $10 thousand in discounts during that same timeframe.
While transactions may be recorded in one or more arrangements, the typical balance is a debit, contrasting with the usual credit balance in a standard sales account. Calculating contra revenue involves a straightforward deduction of gross sales from net sales. The contra asset account Accumulated Depreciation is deducted from the related Capital Assets to present the net balance on the parent account in a company’s balance sheet. A contra revenue represents any deductions or offsets that need to be removed from gross revenue to provide a clearer understanding of actual income — such as in the example just provided. These accounts will typically help track sales discounts, product returns, and allowances (e.g., a price reduction for a good with minor defects). You may use accounting software packages, such as QuickBooks Online to set up contra accounts.
He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. When the company pays the cost of having the flyer printed, a journal entry is done. 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.
The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a contra revenue account balance sheet. Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet.
Contra liability accounts
These less-frequent contra accounts come into play when you need to account for changes in the outstanding liabilities for your business. For example, when your company borrows money, you would identify that debt in a Notes Payable account. Furthermore, if you subsequently pay off that debt early and capture a discount, the contra liability account — Discount Notes Payable — would record those savings.
- It’s commonplace for businesses to encounter refund requests or returns from customers, and offering discounts is also a standard practice.
- Contra revenue is a deduction from the gross revenue reported by a business, which results in net revenue.
- A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet.
- In the realm of accounting, contra revenue plays a significant role in accurately reflecting a company’s financial performance.
- For example, if your business has accounts receivable of $50,000 and an allowance for doubtful debts account totalling $5,000, the net accounts receivable is $45,000.