Contra liabilities are common in companies that sell bonds to raise capital. To drum up interest in the bond, the company Accounting For Startups The Entrepreneur’s Guide will sell it at a discount. For example, a bond with a principal amount of $1,000 may be sold for only $950.
For its day-to-day operations, the business maintains a fleet of 75 identical 2016 Ford Explorer limousines, each initially retailing at $150 thousand. However, these vehicles have experienced significant wear and tear in the intervening years. And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand.
Sales Discounts
There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra liabilities reduce liability accounts and carry a debit balance. Contra equity accounts carry a debit balance and reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance.
The purpose of the Sales Returns account is to track the reduction in the value of the revenue while preserving the original amount of sales revenue. A delivery van is purchased by a business to use in delivering product and Law Firm Finances: Bookkeeping, Accounting, and KPIs 2023 picking up materials. The company uses Straight-Line Depreciation to track the loss of value of the asset over time. Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers.
What Is a Contra Account?
The difference between an asset’s account balance and the contra account balance is known as the book value. By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes. For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately.
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. 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. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.
How are contra accounts recorded?
Rather than pay this cost up-front and tie up a significant chunk of capital, Show-Fleur makes this purchase on credit with a 90-day due date after invoicing. Fortunately, the seat vendor offered an early payment discount of 5%, meaning that when Show-Fleur paid off its full credit note within https://business-accounting.net/the-starting-salary-for-accounting-firm-lawyers/ the first 30 days, it recouped $30 thousand in savings. The purpose of the Allowance for Doubtful Accounts is to track the reduction in the value of the asset while preserving the historical value of the asset. When researching companies, the financial statement is a great place to start.
- 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.
- This may occur in the retail sector, where a buyer may not like the product.
- It’s important to note that sales returns and allowances impact your gross revenue, reducing it by the amount of returns and allowances given.
- Contra accounts are confusing at first, but, with a little study, understanding them becomes second nature.
- Contra liability, equity, and revenue accounts have natural debit balances.
