Discount on Notes Receivable is a contra asset account with a credit balance that reduces the normal debit balance of its parent Notes Receivable asset account in order to present the net value of receivables on a company’s balance sheet. In order to balance the journal entry, a debit will be made to the bad debt expense for $4,000. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month.

• For example, a building is acquired for $20,000, that $20,000 is recorded on the general ledger while the depreciation of the building is recorded separately.
• Contra asset account examples include any transaction made on a contra account to balance out the debit account.
• The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold.
• The most common contra account is the accumulated depreciation account, which offsets the fixed asset account.
• Sometimes the balances in the two accounts are merged for presentation purposes, so that only a net amount is presented.

A contra account is where we record events that are contrary to a general ledger parent account, also called a relating account. The balance of the contra account will offset its parent account while still preserving the value of the transactions recognized in the relating account. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account. The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold.

What Other Types of Contra Accounts Are Recorded on the Balance Sheet?

Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock. When a company gives a discount to customers in an effort to convince them to buy its goods or services, it is recorded in the discount on sales account. A company creates allowances bookkeeping for startups for doubtful accounts to record the portion of accounts receivable which it believes it will no longer be able to collect. The amount in allowance for doubtful accounts is deducted from the accounts receivable account of a company. Partners carry other brands, including complimentary products and products that compete with the brand owner’s offerings.

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. The amount on the equity contra account is deducted from the value of the total number of outstanding shares listed on https://www.apzomedia.com/bookkeeping-startups-perfect-way-boost-financial-planning/ a company’s balance sheet. The balance in the allowance for doubtful accounts is used to find out the dollar value of the current accounts receivable balance that is deemed uncollectible. The balance sheet shows the amount in the asset section underneath the accounts receivable.

Contra accounts definition

Revenue recognition and expense amortization journal entries are book-specific. In the general ledger, revenue recognition journal entries debit deferred revenue and credit revenue. Expense amortization journal entries debit expense and credit deferred expense. Co-ops and MDF typically reimburse the channel for demand-generating activities.

The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock. Net sales revenue refers to a company’s total sales revenue in a given fiscal period after subtracting certain items. Gross sales revenue is not adjusted for returns, allowances, and discounts. The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline.

How to Record a Contra Account

Obsolete, Unsold and Unusable Inventory are contra asset accounts with a credit balance that reduce the normal debit balance of the main Inventory asset account in order to present the net value of inventory on a company’s balance sheet. Sales returns, sales allowance and sale discounts are different examples of contra revenue accounts. Contra accounts such as these have a debit balance and are deducted from the total amount of a company’s revenue.

• Thus, the natural balance of a contra account is always the opposite of the account with which it is paired.
• The difference between an asset’s account balance and the contra account balance is known as the book value.
• Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees.
• The work plan includes all projects undertaken by the IFRS Foundation Trustees, the International Accounting Standards Board (IASB), the International Sustainability Standards Board (ISSB) and the IFRS Interpretations Committee.
• The contra account is used to report the correct assets while preserving the transactions and balance of the relating account.