contra expense account examples

A liability recorded as a debit balance is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as contra asset accounts. It is not classified as a liability since it does not represent a future obligation. Examples of contra accounts include Allowance for Doubtful Accounts, Accumulated Depreciation, and Return on Sales. The Johnson family’s purchase of furniture illustrated the effect on the financial statements for two kinds of contra accounts, revenue, and asset. Contra accounts are also used in other areas of the financial statements, such as an estimate on an uncontrollable percentage of credit sales in which the amounts listed must be estimable and probable.

Is contra expense account an asset?

What is a Contra Account? In bookkeeping, a contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit (negative) balance. The account offsets the balance in the respective asset account that it is paired with on the balance sheet.

If you offer credit terms to your customers, you probably know that not all of them will pay. Creating this contra asset account builds in a safeguard against overstating your accounts receivable balance. In addition to sales returns, the most common contra revenues are sales discounts and sales allowances. A “discount,” in accounting terms, contra expense account 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.

How to Calculate Units of Activity or Units of Production Depreciation

This transaction records when a customer returns the paid goods, and a refund must be given. DepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. Sales allowance – Allowances are recorded when products sell below the normal price for whatever reason.

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 a reduced total benefits expense for the company. Anytime you need to depreciate an asset, you’ll use an accumulated depreciation contra asset account, which records the amount of depreciation that has been expensed while offsetting the value of the asset being depreciated.

Everything You Need To Master Financial Modeling

By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company. Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset. This depreciation is saved in a contra asset account called accumulated depreciation.

contra expense account examples

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