A contra expense account is a general ledger expense account that will intentionally have a credit balance . In other words, this account’s credit balance is contrary to the usual debit balance for an expense account. The drawing account’s debit balance is contrary to the expected credit balance of an owner’s equity account because owner withdrawals represent a reduction of the owner’s equity in a business. A contra account is a general ledger account that offsets the balance of a corresponding account with which it’s paired. If you debit the contra account, ensure that you offset the related account with a credit balance.

• The net effect of the two accounts is a reduced total benefits expense for the company.
• 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.
• While technically classified as an asset, it functions closer to a liability as it reduces the value of the asset it is paired with.
• Outstanding SharesOutstanding shares are the stocks available with the company’s shareholders at a given point of time after excluding the shares that the entity had repurchased.
• An example of a contra expense account is Purchase Returns and Allowances.

Notes payable represents a liability created when a company signs a written agreement to borrow a specific amount of money. The lender may offer the company a discount if it repays the note early. The discount on notes payable reduces the total amount of the note to reflect the discount given by the lender. Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements. Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. Transactions made to contra accounts are presented on a company’s financial statements under the related account.

What Is the Difference Between Net Revenue, Net Sales, Cost of Sales & Gross Margin?

The contra revenue account is a reduction from gross revenue, which results in net revenue. These transactions are reported in one or more contra revenue accounts, which usually have a debit balance and reduce the total amount of the company’s net revenue. 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. When a contra asset account is first recorded in a journal entry, the offset is to an expense.

• Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years.
• In order to balance the journal entry, a debit will be made to the bad debt expense for $4,000.
• Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance.
• If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000.
• Purchases Returns account which is maintained against Purchases account is contra-expense account.

Contra accounts are needed for determining the book value of assets held by a company. For accounting purposes, the book value is realized by the difference between the asset’s account balance and contra account balance. Contra accounts play a major role in estimating the book value of an asset.

Accounting Definitions of Contra-Revenues vs. Expenses

Contra assets allow for more granular visibility on the balance sheet by maintaining historical costs and independent values rather than reducing the original account directly. Learn why contra accounts, when utilized correctly along with a paired account, are a crucial component of accurate accounting and financial review. Money paid to an employee under an accountable expense account is not treated as taxable income to the employee; Where as money paid to an employee under an unaccountable plan is treated as income to the employee. Credit BalanceCredit Balance is the capital amount that a company owes to its customers & it is reflected on the right side of the General Ledger Account.

The amount of gross revenue minus the amount recorded in the contra revenue accounts equal a company’s net revenue. A transaction is made under the sales return account when a customer returns a product to the company for a refund. Sales allowance represents discounts given to customers to entice them to keep products instead of returning them, such as with slightly defective items. The sales discount account represents the discount amount a company gives to customers as an incentive to purchase its products or services. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset.

Depreciation Expense Account Vs. Allowance for a Depreciation Account

They are categorized as current assets on the balance sheet as the payments expected within a year. Long-Term Assets are parent accounts that contain the original acquisition cost of fixed assets. Suppose a company has recorded $100,000 in accounts receivable (A/R) and $10,000 in the allowance for doubtful contra expense account accounts (i.e. 10% of A/R is estimated as uncollectible). A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.