A separate account used in such a situation is sometimes called a adjunct account. In an accounting system, ledger accounts are designed to contain only similar transactions and/or balances. A separate account is needed whenever the nature of transactions changes.

Liability Contra Account

At Invoiced, we provide a suite of solutions that work together to make managing your invoicing, accounts receivable, and accounts payable seamless and easy. To convert your invoice management efforts to an electronic format that can easily share data with other financial systems, businesses can leverage Invoiced’s E-invoice Network. At the same time, our Accounts Receivable Automation software and Accounts Payable Automation software makes tracking, managing, and processing crucial assets and liabilities — and their contras — easier than ever before. The hottest retail item of today can be relegated to nostalgia channels on YouTube tomorrow. And when your business still has some of these outdated, unwanted, or unusable items in your inventory, you’ll want to offset the lost value of these assets in your general ledger and balance sheet. So rather than adjusting your Inventory account, you would update its contra account — Obsolete Inventory.

Is Unearned Revenue a Contra Account?

Revenue gets recorded when you actually do the work or deliver the goods, sticking to the revenue recognition principle. For more info on assets and how they relate to liabilities, see our section on accounting balance sheet example. As evident from the table below, each contra account has a parent account contra revenue account whose normal balance is often exactly opposite of the normal balance of the relevant contra account. Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers. The amount is not reported, and the net sales amount is reported on the income statement.

Cash Flow Statement

A company creates allowances 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. A contra account is also known as a valuation allowance, because it adjusts the carrying value of the account with which it is paired. A company might decide to purchase its stock when the board of directors feel the stock is undervalued or when it wishes to pay its shareholders dividends. The amount on the equity contra account is deducted from the value of the total number of outstanding shares listed on a company’s balance sheet.

What Is the Benefit of Using a Contra Account?

Generally in the financial statements the revenue account would be offset against the contra revenue account to show the net balance. A contra revenue account is a revenue account that is expected to have a debit balance (instead of the usual credit balance). In other words, its expected balance is contrary to—or opposite of—the usual credit balance in a revenue account.

• It’s normal for businesses to receive refund requests or returns from customers.
• 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.
• Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism.
• Knowing the different types of revenue accounts is key for nailing financial reports.
• Allowance for uncollectible accounts, or allowance for doubtful accounts, is one of the most common contra current asset accounts.

• For more on accounting basics, check out our accounting notebook and accounting 101 pdf.
• In the event that a contra account is not utilized, it can become increasingly troublesome to determine historical costs, which makes tax preparation time-consuming and difficult.
• (A debit balance in a contra asset account will violate the cost principle.) Learn more about contra asset accounts.
• You debit the contra revenue accounts and credit the corresponding revenue accounts.
• A business called Show-Fleur offers private driving tours of local botanical gardens — all from the comfort of high-end limousines.
• It is because clubbing together dissimilar transactions impedes any analysis.

This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders. Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values. Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at Scale Venture Partners, focused on technology. He’s currently a VP at KCK Group, the private equity arm of a middle eastern family office. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions. When researching companies, the financial statement is a great place to start.

What is Accumulated Depreciation?

• The amount is not reported, and the net sales amount is reported on the income statement.
• Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting.
• Businesses leverage contra-revenue accounts to distinguish between net and gross revenue.
• 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.
• However, it’s important to keep in mind that you can create any contra account you want to more clearly describe your business — this is not an exhaustive or definitive list.