By reporting Contra Accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount. Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset. Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance. 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.
- The Notes Receivable account documents the total value of any promissory notes held by the company.
- This allows the reader to see both the current and historical book values for a particular asset or liability.
- For its day-to-day operations, the business maintains a fleet of 75 identical 2016 Ford Explorer limousines, each initially retailing at $150 thousand.
- The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold.
Revenue is an income statement account, but it flows through to the equity section of retained earnings as well. Any products that are sold at a discount or returns are deducted from gross revenue to produce net revenue as the top line on the income statement. 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.
Example #1: Revenue Contra Account
The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount. This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms. Most accounts receivable would just be the time between purchase and credit card settlement. If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative. On the other hand, if you’re looking at a high-flying growth stock that reports new revenue growth records each quarter but has a massive allowance for doubtful accounts, there may be problems ahead. The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet.
Accounting software can simplify the management of and reporting from your ledger. With the appropriate level of automation integration in your chosen tool, you can pull the relevant values into these individual accounts directly from invoices, credit agreements, and other documentation. The discount on bonds payable amount shows the difference between the amount of cash received when issuing a bond and the value of the bond at maturity. Contra accounts are confusing at first, but, with a little study, understanding them becomes second nature. Let’s go over how they work and what the main types are, and then finish with an example.
Benefits of Contra Accounts
Inventory is updated with the debit entry and the cost of goods sold is reduced with the credit. As in my tools example, the individual or company could end up owing more to the other business when the debtor is also a vendor. Therefore, it’s vitally important that lenders ask for and receive both payables and receivables.
To convert your invoice management efforts to an electronic format that can easily share data with other financial systems, businesses can leverage Invoiced’s E-invoice Network. At the same time, our Accounts Receivable Automation software and Accounts Payable Automation software makes tracking, managing, and processing crucial assets and liabilities — and their contras — easier than ever before. 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.
Examples of Contra Account
The balance sheet shows the amount in the asset section underneath the accounts receivable. Accumulated depreciation is the total of all depreciation that has been charged to existing fixed assets such as equipment and buildings. There can be hidden value in stocks that have a lot of fully depreciated buildings. Companies like to depreciate assets as quickly as possible to get the tax savings, so the balance sheet may not state the true value of fixed assets.
Contra liabilities are common in companies that sell bonds to raise capital. For example, a bond with a principal amount of $1,000 may be sold for only $950. The bond is listed on the balance sheet at the full amount of $1,000, but the cash received is just $950, so a contra liability for the discount is listed to make the entry balance. Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement.
And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand. For industries that rely on natural resources — mining, logging, oil, gas — depletion tracks the gradual exhaustion of the raw material in question, offsetting that loss in value against the initial appraisal of the land. So an Accumulated Depletion account would serve as the contra for the parent Fixed Asset account.
Instead of debiting the asset account directly, the contra asset account balance will be credited (reduced) separately. Examples include accumulated depreciation, sales returns and allowances, and contra equity accounts like treasury stock. To account for these returns and allowances, TechGadget records the amount in a contra revenue account called “Sales Returns and Allowances.” On the income statement, the net sales revenue will be reported as $77,000 ($80,000 – $3,000). 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. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet.