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What is a contra expense account?

Instead, an adjusting journal entry is done to record the estimated amount of bad debt. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete. Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods. In this scenario, a write-down is recorded to the reserve for obsolete inventory. 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.

  • 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.
  • If the related account is a liability account, then a contra liability account is used to offset it with a debit balance.
  • In double entry bookkeeping terms, a contra expense account refers to an account which is offset against an expense account.

The monthly accounting close process for a nonprofit organization involves a series of steps to ensure accurate and up-to-date financial records. The purpose of the Owner’s Withdrawal account is to track the https://bookkeeping-reviews.com/ amounts taken out of the business without impacting the balance of the original equity account. Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a creditbalance.

What is Contra in Accounting?

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. Contra equity accounts carry a debit balance and reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation.

  • Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available.
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  • The purchase discounts account will have a credit balance of $2,000 (2% of $100,000), which represents the discount received from the supplier.

The company’s income statement will report the combination of the amounts in accounts 4210 and 4211 in order to show the company’s actual expense of $8,000 ($10,000 minus $2,000). Discount on Bonds Payable is a contra liability account with a debit balance, which is contrary to the normal credit balance of its parent Bonds Payable liability account. Contra expense 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.

Presentation of Contra Expenses

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. The allowance for doubtful accounts is used to reduce the net income by the estimated amount of uncollected receivables. This account helps to give a more accurate picture of the company’s financial position. This question is asked by many students, accountants, and professionals.

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Additionally, revenue is reported on the income statement while contra expense is not. Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Offsetting the asset account with its respective contra asset account shows the net balance of that asset.

Why Use a 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. Contra expense is an important component of financial accounting as it allows organizations to offset income and expenses in the same reporting period. This helps them to accurately present their financial position to both internal and external stakeholders.

The contra liability account is less common than the contra asset account. An example of a contra liability account is the bond discount account, which offsets the bond payable account. A contra liability account is not classified as a liability, since https://quick-bookkeeping.net/ it does not represent a future obligation. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value.

In other words, this account’s credit balance is contrary to (or opposite of) the usual debit balance for an expense account. Expense accounts and the contra expense accounts with which they are paired are typically combined in the income statement in a single line item, https://kelleysbookkeeping.com/ so that readers are not aware that a contra account even exists. By using contra expense accounts, financial statement users can gain a more accurate and detailed understanding of the company’s expense structure, allowing for better financial analysis and decision-making.

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