Contra Account Accounting Definition + Journal Entry Examples

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. The sales discounts contra revenue account records the discounts given to customers on sales made to them, normally a cash or settlement discount. The account is normally a debit balance and in use is offset against the revenue account which is normally a credit balance.

May 11Louisiana-based Ochsner Health will cut 770 employees in both Louisiana and Mississippi (roughly 2% of its workforce), CEO Pete November announced in an email to employees, citing high inflation, increasing costs of labor and the end of Covid-era government relief funding. May 18TuSimple’s cuts affect 30% of its global workforce, according to a SEC filing, and comes less than half a year after the San Diego-based autonomous truck developer slashed a quarter of its workforce, citing “current market conditions” as the reason for the layoffs. There is no answer to contra accounts…best i can guess is that QB does NOT have the ability. Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a credit
balance. GAAP, the allowance for doubtful accounts represents management’s estimate of the percentage of “uncollectible” accounts receivable (i.e. the credit purchases from customers that are not expected to be paid).

Accounting Definitions of Contra-Revenues vs. Expenses

Let’s say Company A is working on a project to partner up with Company B. Company A incurs expenses (payroll, capital expenditures, development, etc.) to meet the requirements of Company B. Later, Company B determines that the costs incurred by Company A were significant and agrees to give Company A $1,000. Should Company A record the $1,000 as revenue or as a reduction of expense? Obviously, there is a great deal of flexibility depending on how you “paper” the transaction, but interested in thoughts on a holistic level. When the two balances are offset against each other they show the net balance of both accounts.

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. Actually, EITF specifically states that expense reimbursement related to providing services is to be presented as revenue, even if there is no margin. However, that’s not the exact case presented in the example.

Revenue or Contra Expense

The account offsets the balance in the respective asset account that it is paired with on the balance sheet. In addition to sales returns, the most common contra revenues are sales discounts and sales allowances. A “discount,” in accounting terms, usually refers to a price reduction offered as an inducement to customers who pay their bills quickly, not to a “sale” price, which is simply incorporated into gross revenue. Sales allowances are price reductions offered to persuade customers to accept merchandise with damage or minor defects not serious enough to warrant a return.

The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account. The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold. 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. May 9San Francisco-based Twist Bioscience will slash 25% of its workforce (estimated to affect 270 employees), the San Francisco Business Journal reported.

This is to ensure that everything is accurate, and the reporting of your book is moving well. Just in case you wanted to run a report from your accounts, you can click the drop-down ▼ button on the Action column and then select Run report. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. Such discounts occur when the interest rate stated on a bond is below the market rate of interest and the investors consequently earn a higher effective interest rate than the stated interest rate. As I understand the post, Company A is NOT a customer or client of Company B. Company A and B entered into a project (partnered up). While the phrase “to meet the requirement of Company B” is stated, I understood it to mean that there were NO services rendered by Co.

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Let’s consider a fictional example of a small retail business called “GadgetHub” to illustrate the use of a contra expense account in financial accounting. The investors paid only $900,000 for these bonds in order to earn a higher effective interest rate. Company A recorded the bond sale in its accounting records by increasing Cash in Bank (debit asset), Bonds Payable (credit liability) and the Discount on Bonds Payable (debit contra-liability). The unamortized debit balance in the Discount on Bonds Payable contra liability account will decrease as it is amortized (i.e., allocated) to Interest Expense over the life of a bond, until it reaches a nil balance when the bond is finally redeemed. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean.

• He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.
• We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R).
• May 25JPMorgan Chase will provide transitionary and full-time positions for roughly 7,000 First Republic employees but cut its remaining workforce of roughly 1,000, with a spokesperson telling Forbes the “vast majority of First Republic employees” will be given jobs at the bank.
• For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets.
• Since you no longer have the shoes, aka the asset, you record a $20 expense on your income statement, But you also record $30 in revenue from the sale, so your net income is $10.

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. Purchase returns, allowances and discounts are all examples of contra expense accounts. The accounts normally have a credit balance and in use are offset against the purchases account which is normally a debit balance.

What is a Contra Liability?

In accounting terms, an expense is a cost incurred to produce revenue reported on the income statement. If you buy a pair of shoes from your supplier for $20, that’s a cost, but it’s not yet an expense. That’s because, as far as accounting is concerned, you haven’t really “spent” $20. You’ve just converted $20 worth of cash into $20 worth of shoes; an asset that remains in your inventory. Since you no longer have the shoes, aka the asset, you record a $20 expense on your income statement, But you also record $30 in revenue from the sale, so your net income is $10. Of course, you’ll also have to pay your employees’ wages, your rent, your utilities and other costs.

It might be more efficient or convenient for the department to initially pay all the expenses; however, the cost of that activity on the university’s books should only reflect its share of the expenses. In these situations, the funds received from the other party should be recorded as a reimbursement of expenses and not as revenue. As a principle IMHO it is wrong because most readers of financial statements (i.e., expense form template investors and creditors) never hear of, nor really care about EITF 01-14. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own.

He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. June 14Phoenix-based Nikola Corporation said it has cut 120 employees based in Arizona and another 150 across “multiple sites” supporting the company’s programs in Europe, as part of a reorganization plan intended to save more than $50 million per year and as the company looks to consolidate its operations. June 26Robinhood’s layoffs are expected to affect 150 employees, according to an internal memo obtained by the Wall Street Journal—the brokerage’s third round of cuts since the start of 2022, including one round last August affecting nearly a quarter of Robinhood’s staff. I think the makers of QBO should consult an accountant to understand what a contra account is and then to consult the nerds (a term of love, trust me – I married one and are surrounded by many and the world would be a much darker place without them) on how to code that into the program. Get instant access to video lessons taught by experienced investment bankers.

• I strongly suggest having a trained Accountant do this (or something in a similar vein) if you need it done for your business.
• When a bond is sold at a discount, the issuer records the cash received from the bond sale with a debit to a Bank account asset, while also increasing the liability of Bonds Payable with a credit entry, which is partially offset by a debit to the Discounts on Bond Payable contra liability account.
• Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory.
• A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity).
• Allowance for Doubtful Accounts pairs with the Bad Debts Expense account when doing adjusting journal entries.

The Allowance for Doubtful Accounts is used to track the estimated bad debts a company my incur without impacting the balance in its related account, Accounts Receivable. An estimate of bad debts is made to ensure the balance in the Accounts Receivable account represents the real value of the account. Allowance for Doubtful Accounts pairs with the Bad Debts Expense account when doing adjusting journal entries. In a normal professional services organization, where you are billing for both time on the one hand and reimbursable expenses (air fare, hotel, meals) on the other, you record the reimbursables separately as revenue and expenses, even if there is no margin. May 25JPMorgan Chase will provide transitionary and full-time positions for roughly 7,000 First Republic employees but cut its remaining workforce of roughly 1,000, with a spokesperson telling Forbes the “vast majority of First Republic employees” will be given jobs at the bank. July 27Funko—the company known for its collectible dolls based on pop culture—announced in a filing with the SEC it would lay off between 180 and 200 employees in an effort to refocus and consolidate it workforce.

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 net effect of the two accounts is https://online-accounting.net/ a reduced total benefits expense for the company. I don’t recommend this method be used, except by Accountants, who will know what they’re doing regarding journal entries – I will be seeing up a contra expense account to record reimbursement of expenses incurred while an organization was acting as an agent for another organization.