The other side of the transaction is posted to https://bookkeeping-reviews.com/ because there is no value in retaining the sales transaction in the cash account. 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.
- For analysts, decision makers, planners, managers, project leaders—professionals aiming to master the art of “making the case” in real-world business today.
- You might have a sales return contra account or a sales discounts account.
- To report the real value of the financial statement, you will need to record the amount you can reasonably estimate that will probably effect the financial statement classification.
- Moreover, the natural balance of sales revenue is credit in the balance sheet.
- The amount is not reported, and the net sales amount is reported on the income statement.
The main contra equity account is treasury stock, which is the balance of all stock repurchased by the company. When a company repurchases shares, it increases the fractional ownership of all remaining shareholders. By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount. Contra liability accounts such as discount on bonds payable and discount on notes payable usually carry debit balances. Expenses are the costs of doing business, but not all costs are expenses. In accounting terms, an expense is a cost incurred to produce revenue reported on the income statement.
Income Statement Explained
A contra account is a negative account that is netted from the balance of another account on the balance sheet. The same is true for other asset accounts like accounts receivable. Accounts receivable is rarely reported on the balance sheet at its net amount. Instead, it is reported at its full amount with an allowance for bad debts listed below it. Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. If Music World returns merchandise worth $100, Music Suppliers, Inc., prepares a credit memorandum to account for the return.
The use of contra accounts ensures the accuracy of financial accounting records, as the value of the original accounts is not directly reduced. 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. However, you will need to debit contra revenue accounts because they are the opposite of revenue accounts. The purpose of a contra account is to accurately report value of operating performance and assets for a firm.
You make sales frequently, but you might not consistently earn money from side activities. Non-operating revenue is listed after operating revenue on the income statement. A contra account is where we record events that are contrary to a general ledger parent account, also called a relating account.