Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. Providing sales allowance represents discounts given to customers to entice them to keep products instead of returning them. An equity Contra account reduces the total number of outstanding shares listed on a company’s balance sheet. Creating allowances for doubtful accounts represents the percentage of accounts receivable a company believes it cannot collect. Such allowance for doubtful accounts offsets a company’s accounts receivable account. At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset.
The Sales Discounts account shows the discounts you gave to a customer. 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. The sales returns account contains either an allowance for returned goods, or the actual amount of revenue deduction attributable to returned goods. Contra accounts allow you to show the amounts that offset a paired related account. As a small business owner, understanding how to set up contra accounts enables you to prepare and maintain accurate financial records. Keep reading to learn more about contra revenue accounts and what should go in them.
You might have seen in the balance sheet; all the accounts are shown at the net value after all the adjustments. Let’s say, the value of machinery is shown after reducing the depreciation from it. While there is nothing wrong here, there is also another way you could represent it i.e. show https://accounting-services.net/advantages-and-disadvantages-of-the-corporate-form/ the full value of machinery (cost) in the balance sheet and then reduce the depreciation amount. Let me give you the detailed steps on how to set up a contra account for accumulated depreciation. However, if the billing office stopped there, you would overstate your assets and net income.
Operating revenue is revenue you receive from your business’s main activities, like sales. If you own a landscaping company, your business’s operating revenue is derived from your services. Or, if you own a pie shop, your business’s operating revenue comes from selling the pies. In footnote 3, the company reports, “Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021.”
What is Contra Revenue?
Profit shows you the amount your business gains or loses after you deduct expenses. To calculate your profit, or net income/loss, you must use your business’s revenue as a starting point. To find your profit, subtract your total expenses from your total revenue. When researching companies, the financial statement is a great place to start. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.
- In footnote 3, the company reports, “Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021.”
- I’ll have to do it this way because the reimbursements were originally mis-catagorized as income, which violates GAAP.
- We’ll need to dig into the footnotes to find out what the contra accounts are.
- The difference in the price, $1,500, is the amount for return on sale.
A revenues account with a debit balance instead of the usual credit balance. Examples include sales returns, sales allowances, and sales discounts. Contra accounts are used to reduce the original account directly, keeping financial contra revenue account accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value. As mentioned, contra asset accounts usually have a negative value which is the same as a credit balance.
Doubtful Debts and Contra Assets
QB itself isn’t set up to handle something like this on its own, so manual entries is the only way I know of to take care of it. I strongly suggest having a trained Accountant do this (or something in a similar vein) if you need it done for your business. A contra account is where we record events that are contrary to a general ledger parent account, also called a relating account. Contra accounts allow us to report the true value of a firm’s assets. The balance of the contra account will offset its parent account while still preserving the value of the transactions recognized in the relating account. Contra revenue accounts deduct money from your business’s sales revenue.
As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find. Companies bury them in the footnotes and often don’t break out the actual calculation. Still, it is important when possible to consider how the net accounts are calculated and be wary of companies that are reporting a ton of bad debts.