For example, Service Revenue is a type of account that records sales from services you perform. As the name indicates, sales return accounts are maintained to record the return of goods by customers, if any.

But for presentation purposes it is sometimes necessary to show net balance of two accounts. For example, there need to be separate accounts to hold the actual cost of property, plant and equipment and related accumulated depreciation. If we record depreciation what is a contra revenue account related adjustments in the cost accounts we will lose key information about the original cost of the assets and accumulated depreciation. To avoid this loss of important data, we record actual cost and depreciation in separate ledger accounts.

For example, a distributor purchases $1 million in products and/or services. Closing the Income Summary account—transferring the balance of the Income Summary account to the Retained Earnings account .

How Are Accumulated Depreciation And Depreciation Expense Related?

Here is an example of a journal entry you would create when you make a sale . For accrual accounting, you need to credit one account and debit another. If an account is increased by one account, it is decreased by the other. Revenue, or sales, is the income your business receives from business-related activities.

Accumulated depreciation offsets a company’s real property assets, such as buildings, equipment and machinery. Accumulated deprecation represents the cumulative amount of depreciation expense charged against an asset. Now, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. Contra revenue reduced gross revenue, resulting in net revenue. These contra revenue accounts tend to have a debit balance. Therefore, a contra asset account will show the opposite balance – the credit balance.

Account Types

Sales Discounts Credit Card Discounts Sales Returns And Allowances Allowance For Doubtful Accounts. A contra liability account is a liability account that is debited in order to offset a credit to another liability account. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available.

For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parentaccount gross balance to present the net balance. The contra account offsets the parent account to reveal the remaining net amount of non-current assets. Credit BalanceCredit Balance is the capital amount that a company owes to its customers & it is reflected on the right side of the General Ledger Account.

Contra Account: A Complete Guide

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 costs, which can make tax preparation more difficult and time-consuming. Contra revenue accounts appear near the top of the income statement, as a deduction from gross revenue. There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue.

• Liability has a credit balance, whereas a contra liability account has an opposite balance that is debit balance.
• Debit depreciation expense for $16,875 and credit accumulated depreciation-equipment for $16,875.
• Two common contra asset accounts include allowance for doubtful accounts and accumulated depreciation.
• The difference represents reduction in the value of the bond.
• On the balance sheet, the allowance for doubtful accounts can reduce the totals in the business’s accounts receivable.

Debit depreciation expense for $16,875 and credit accumulated depreciation-equipment for $16,875. Debit accumulated depreciation -equipment for $16,875 and credit depreciation expense for $16,875. Debit depreciation expense for $18,625 and credit accumulated depreciation-equipment for $18,625. Accounts payable is the amount of money owed by companies that use or buy other resources from external providers. Explore the definition of accounts payable and look into some examples of accounts payable that are often incurred by businesses. Bills payable or notes payable is a liability that is created when a company borrows any specific amount of money.

What Is The Difference Between Net Revenue, Net Sales, Cost Of Sales & Gross Margin?

If Music World returns merchandise worth $100, Music Suppliers, Inc., prepares a credit memorandum to account for the return. This credit memorandum becomes the source document for a journal entry that increases the sales returns and allowances account and decreases accounts receivable. The equity section of the balance sheet is where the shareholder’s claims to assets are reported. The main contra equity account is treasury stock, which is the balance of all stock repurchased by the company.

A contra revenue account is a revenue account that is expected to have a debit balance . In other words, its expected balance is contrary to—or opposite of—the usual credit balance in a revenue account.

Types Of Contra Accounts For Revenues

We are better off subtracting the accumulated depreciation account from PPE cost account to arrive at the net balance of the PPE. A contra-account is a balance sheet account whose purpose is to reduce the amount of another account. That is why asset contra-accounts have credit balances while liability contra-accounts have debit balances. Typically, your revenue accounts add money to your business. However, you will need to debit contra revenue accounts because they are the opposite of revenue accounts.

When a company repurchases shares, it increases the fractional ownership of all remaining shareholders. In an accounting system, ledger accounts are designed to contain only similar transactions and/or balances. A separate account is needed whenever the nature of transactions changes. It is because clubbing together dissimilar transactions impedes any analysis. For example, we need separate accounts to hold the actual cost of property, plant and equipment and related accumulated depreciation. If we record depreciation expense in the cost accounts directly, we will lose key information about the original cost of the assets and accumulated depreciation. It shows deductions from the revenue of a company, which results in net revenue.

A revenues account with a debit balance instead of the usual credit balance. Examples include sales returns, sales allowances, and sales discounts. For example, we need to keep the face value of a bonds payable and the premium amount in separate ledger accounts even though both have credit balances. A separate account used in such a situation is sometimes called a adjunct account. In an accounting system, ledger accounts are designed to contain similar classes of transactions.

Sales discount accounts record the discounts provided to customers when they purchase in bulk or make early payments. Now let’s focus our attention on the two most common contra assets – accumulated depreciation and allowance for doubtful accounts. Contra account is important as it not only allows a company to report the original amount of a transaction but also report any reductions that may have happened so that the net amount will also be reported.

Definition Of Contra Revenue Account

Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts reduce accounts receivable, while accumulated deprecation is used to reduce the value of a fixed asset. A liability that is recorded as a debit balance is used to decrease the balance of a liability.

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. Allowance for doubtful accounts is a contra asset account used to create an allowance for customers that are not expected to pay the money owed for purchased goods or services.

If you want to compare your business’s revenue from period to period, look at your operating revenue. This gives you more of an idea of whether your company is growing or declining since non-operating revenue is irregular. In this lesson, we’ll discuss types of accounting errors that affect the trial balance and errors that do not affect the trial balance.

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. Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value. In the above method, we debit the contra revenue account in the trading account, but generally, the company uses the first method of accounting of contra revenue. In finance, a contra liability account is a liability account that’s debited for the explicit purpose of offsetting a credit to another liability account.