How to Set up Contra Accounts

By viewing these accounts — the parent and contra — in tandem, business owners can gain broader insights, preserve the historical figures stored in the parent account, and make accommodations for any relevant changes. These accounts can be listed based on the respective asset, liability, or equity account to reduce their original balance. If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts.

• Most accounts receivable would just be the time between purchase and credit card settlement.
• In its general ledger, the business will want to capture its gross sales figures and the actual value of the discount.
• Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns.
• A contra account is an essential concept in financial accounting that serves to offset the balance of another account.
• By properly managing depletion accounting, companies in these industries can better track and allocate the costs and value of their natural resources.
• The benefit of using the contra expense account is that the company’s managers can see in account 4210 the total amount that the company paid to the health insurance company.

Contra liability accounts

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• You can estimate the total to record in the allowance for doubtful accounts based on uncollectible revenue totals from the previous year or you can conservatively estimate the amount.
• The presence of contra expense accounts significantly influences the presentation and interpretation of financial statements.
• For example, when a line item on your balance sheet presents the balance of accounts receivable, report the value of allowance of uncollectible accounts below the accounts receivable line.
• The difference between an asset’s account balance and the contra account balance is known as the book value.
• This means that the $85,000 balance is overstated compared to its real value.

Presentation of Contra Accounts

• This account is not classified as an asset since it does not represent a long-term value.
• Contra accounts provide more detail to accounting figures and improve transparency in financial reporting.
• We will define what contra accounts are, the types of contra accounts and provide examples to illustrate.
• The Notes Receivable account documents the total value of any promissory notes held by the company.
• 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.
• Upgrade your productivity and performance with ready-to-use accounting templates designed to streamline contra account management.
• Ratios such as the operating margin and return on assets become more meaningful when they are based on net expenses rather than gross figures.

If there’s an increase to allowance for uncollectible accounts, you record the same amount in the bad debt expense of your income statement. Similarly, accumulated depreciation accounts reduce the value of the fixed assets you report on your financial statements. Contra revenue is a general contra expense account ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement. Examples of revenue contra accounts are Sales Discounts, Returns and Allowances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances.

The Contra Equity Account

It plays a vital role https://www.instagram.com/bookstime_inc in maintaining the accuracy and transparency of a company’s financial statements. Contra accounts are used to record adjustments, reversals, or reductions in the value of assets or liabilities. Contra account accounting plays a crucial role in financial accounting by offsetting the balance of another account.

Example #2: Asset Contra Account

To put it another way, a contra account is an account listed within a general ledger with the purpose of capturing the reduced value of a paired or related account when the two are added together. Writing off your obsolete inventory in this manner allows you to expense the cost of the obsolete inventory while also decreasing your current inventory balance using the contra asset account. The accumulated depreciation account is perhaps the most common contra asset account used by business owners. Moreover, businesses can avoid the harsh lights of compliance issues and investor skepticism with a clean, transparent ledger. Accurate contra account use also smoothes out budget forecasting and financial planning, as businesses are not caught off-guard by suddenly realized losses or overstated assets.