What is Contra Account? Definition + Journal Entry Examples

Contra liability accounts are not as popular as contra asset accounts. A contra expense account is a type of account in financial accounting that offsets the balance of a corresponding expense account. Contra expense accounts have a credit balance, which is the opposite of the typical debit balance found in expense accounts. The purpose of a contra expense account is to reduce the total expenses shown on the income statement by reflecting specific adjustments, recoveries, or reimbursements related to the expense. Obsolete, Unsold and Unusable Inventory are contra asset accounts with a credit balance that reduce the normal debit balance of the main Inventory asset account in order to present the net value of inventory on a company’s balance sheet. Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement.

Of course, you’ll also have to pay your employees’ wages, your rent, your utilities and other costs. Those are expenses, too, because, without them, you wouldn’t have had a store in which to sell the shoes and collect the 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. Expense accounts and the contra expense accounts with which they are paired are typically combined in the income statement in a single line item, so that readers are not aware that a contra account even exists.

Expenses:

Each year of an asset’s life, another year of Depreciation Expense is recorded. The offset to the Depreciation Expense account is Accumulated Depreciation. Units should consider using an allowance for doubtful accounts when they are regularly providing goods or services “on credit” and have experience with the collectability of those accounts.

For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. Examining a trend line of the monthly additions to a contra expense account is a good way to determine whether any third party payments were not made to the company, or if two of these payments were incorrectly recorded within the same month. While accumulated depreciation is the most common contra asset account, the following also may apply, depending on the company. A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger. Of that amount, it is estimated that 1% of that amount will become bad debt at some point in the future.

Contra Revenue Account

The projected bad debt expense is properly matched against the related sale, thereby providing a more accurate view of revenue and expenses for a specific period of time. In addition, this accounting process prevents the large swings in operating results when uncollectible accounts are written off directly as bad debt expenses. An allowance for doubtful accounts is considered a “contra asset,” because it reduces the amount of an asset, in this case the accounts receivable. The allowance, sometimes called a bad debt reserve, represents management’s estimate of the amount of accounts receivable that will not be paid by customers. If actual experience differs, then management adjusts its estimation methodology to bring the reserve more into alignment with actual results. The revenue contra accounts Sales Returns, Discounts and Allowances are subtracted from the main Sales Revenue account to present the net balance on a company’s income statement.

For instance, the company might debit its expense account 4210 Employee Health Insurance Expense when recording the insurance company’s invoice of $10,000. If the company withholds $2,000 from its employees’ wages to pay part of the cost of the insurance, the company will credit its contra expense account 4211 Employee Withholdings for Health Ins. A contra expense is an account in the general ledger that is paired with and offsets a specific expense account. The account is typically used when a company initially pays for an expense item, and is then reimbursed by a third party for some or all of this initial outlay. For example, a company pays for medical insurance on behalf of its employees, which it records in an employee benefits expense account. Then, when the employee-paid portion of the expense is paid to the company by employees, these reimbursements are recorded in a benefits contra expense account.

THE UNIVERSITY OF COLORADO SYSTEM

Contra expense accounts are rarely used, because organizations find it to be easier to record third-party payments directly against an expense account. However, these accounts are still useful when dealing with large quantities of reimbursements, where it is cleaner and less confusing to store the information in a separate account. Thus, the use of a separate contra expense account makes it easier to monitor the flow of expenses and reimbursements. The most common way to manage the accounting is to apply cashback to a single account, i.e., a Cashback Earned account or similar. Some people use an income account, whereas others prefer a contra expense account (i.e., an expense account with a negative balance), but when aggregated with all monthly expenses would result in the right expense value. In some cases, recording a payment as contra expense is an admission that University resources were improperly used to pay for the transaction initially.

https://www.bookstime.com/ accounts have a natural credit balance, as opposed to the natural debit balance of a typical expense account. Therefore, a contra expense account that contains a debit balance must have a negative ending balance. Most accountants choose to record the depreciation over the useful life of an item in the accumulated depreciation contra asset account, which is a credit account.

Contra Account: A Complete Guide [+ Examples]

You can rationalize it all sorts of ways, and you’ve certainly tried, but simply listing a few accounting principles you heard about in Accounting 101 doesn’t justify ignoring others. In response to Wayne’s post, a positive margin is not a requirement for revenue recognition in any existing accounting literature. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. Please contact your sales or account representative to find out how to get the Full Multi-Book Accounting feature. The assistance of NetSuite Professional Services or a Multi-Book authorized partner is required to implement this feature.

• 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.
• Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement.
• Examples of contra assets include Accumulated Depreciation and Allowance for Doubtful Accounts.
• The matters are a bit more complex when you reimburse out-of-pocket expenses from your business (as a legal entity).
• Protect the financial integrity of the State and promote accountability in an objective and efficient manner.
• For cash basis reporting for all fund types, on the BD701 Report, the 5383AA reimbursement accounts are grouped with the 43XXXX revenue accounts.

For example, rent expense, salaries expense, depreciation expense, etc. However, that $1.4 billion is used to reduce the balance of gross accounts receivable. Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount.

What is a contra expense account?

The difference between an asset’s account balance and the contra account balance is known as the book value. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. 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. On the income statement, the net cost of goods sold will be reported as $98,000 ($100,000 – $2,000), reflecting the impact of the purchase discount. However, cashback can be more consistent, easier to redeem, and more versatile.

Ultimately, you should ask the client how they prefer to be charged for billable expenses. They might have a preferred process, based on their accounting system. Going with their option typically means you’ll get reimbursed sooner than later.

It will be shown with revenues for cash basis reporting on the monthly reports, but for GAAP basis will roll with other reimbursements to reduce expenditures. This account should be used only as directed by OSC, OSBM, or the Office of Economic Recovery and Investment. The 5382xx Statewide Reimbursement accounts may be used by either governmental or proprietary funds including universities unless noted otherwise. However, https://www.bookstime.com/articles/contra-expense for universities and proprietary funds, the accounts are only valid for cash basis monthly reporting, and for year-end GAAP reporting the 5382xx account balances must be reclassified to the appropriate expense accounts and be zero at June 30. Only governmental funds may have balances at June 30 in the 5382xx accounts, and for GAAP reporting these balances roll to the Reimbursements caption to offset expenditures.

Correctly identifying revenue is critical from an accounting and financial reporting standpoint. The first task in identifying revenue is to look at every dollar received from an outside source (as opposed to dollars received from another FOPPS) and decide whether it is revenue, a balance sheet activity, or a reduction of expense. The second task is to record any revenue in the appropriate revenue classification. The purpose of a contra expense account is to record a reduction in an expense without changing the balance in the main account. This account is a contra-expense account to record reimbursements.