By tracking this data accurately through contra accounts, you can assess product quality and customer satisfaction trends over time. 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. Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt.

Examples of Contra Accounts

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. Angela Boxwell, MAAT, is an accounting and finance expert with over 30 years of experience.

Is Unearned Revenue a Contra Account?

The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. The new accounting rules contra revenue meaning must be immediately communicated to the performers under the signature and leave them a copy of the guidance document. Copies of the guidance documents for the relevant areas of accounting should be in separate folders.

Contra Asset Accounts

We’ll need to dig into the footnotes to find out what the contra accounts are. This would allow the company to track the amount of money that has been borrowed. The contra liability account would be used to offset the liability account on the balance sheet.

• Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean.
• ABC Computers makes sales of 90,000; unfortunately, due to a fault in a product, they received returns of 2,500.
• If a customer returns a product, the ‘Sales Returns’ contra revenue account lowers the total sales revenue, reflecting the true income.
• A contra revenue account allows a company to see the original amount sold and to also see the items that reduced the sales to the amount of net sales.

If customers return $500 worth of books and receive $200 in allowances for minor damages, plus they take advantage of $300 in early payment discounts, these amounts are recorded in contra revenue accounts. 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.

Contra Account Vs Adjunct Account

You’ve just converted $20 worth of cash into $20 worth of shoes; an asset that remains in your inventory. Since you no longer have the shoes, aka the asset, you record a $20 expense on your income statement, But you also record $30 in revenue from the sale, so your net income is $10. Of course, you’ll also have to pay your employees’ wages, your rent, your utilities and other costs. Those are expenses, too, because, without them, you wouldn’t have had a store in which to sell the shoes and collect the revenue.

In addition, you can examine the impact of sales discounts on increases in sales, to see if it makes sense to continue offering discounts in order to boost profits. 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. In addition to sales returns, the most common contra revenues are sales discounts and sales allowances.

Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount. A contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability. It is not classified as a liability since it does not represent a future obligation.

A contra revenue account needs while the bookkeeper is preparing some important statements about finances. However, one should always remember that the contra revenue account must be analyzed not separately but together with the revenue account, to see and to calculate the difference between these two accounts. For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance. Investing in reliable accounting software can simplify tracking and managing these specialized accounts effectively.

Baking in room for bad debt, asset depreciation, and returned goods means fewer surprises and more confident stakeholders. In the above method, we debit the contra revenue account in the trading account, but generally, the company uses the first method of accounting for contra revenue. A contra revenue account allows a company to see the original amount sold and to also see the items that reduced the sales to the amount of net sales. If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative.