Contra Liability Account: What it is, How it Works, Example

They happen when you reduce the selling price of an item, typically due to minor defects or because a customer negotiated a lower price after the sale. Wanting to spruce up its aging inventory, Show-Fleur purchased new, climate controlled-seats for its fleet, delivering increased comfort for contra revenue account passengers and a cleaner, more modern look for vehicle interiors. The initial cost of this upgrade was $8 thousand per limo or $600,000 in total. Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

Example #2: Asset Contra Account

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. Marin County was ranked the most generous county in California, with 23.50% of its over 130,000 returns filed itemizing charitable contributions. San Mateo County came in second, with 18% of the county’s tax returns listing charitable contributions. Contra Costa County came in third with 17.9% of tax returns showing donations. A company receives rebates for advertising it does on behalf of brands it carries in its stores.

Cash Flow Statement

• The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable.
• Still, it is important when possible to consider how the net accounts are calculated and be wary of companies that are reporting a ton of bad debts.
• The offset to the Depreciation Expense account is Accumulated Depreciation.
• Contra assets give investors a better picture of how you use your assets over time.
• A contra account is a negative account that is netted from the balance of another account on the balance sheet.

For example, if you sold a product for $100 and it’s returned, you would record a $100 decrease in your sales revenue. This guide is also related to our articles on understanding gross vs. net profit, understanding prepaid expenses, and understanding unearned revenue. When the company pays the cost of having the flyer printed, a journal entry is done. 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). This can help clear out inventory without making customers accustomed to buying only when there’s a sale. Here are some practical ways to lower contra revenue, improve your discount strategies, and make sure your policies match industry standards.

• In its general ledger, the business will want to capture its gross sales figures and the actual value of the discount.
• 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).
• When a company repurchases shares, it increases the fractional ownership of all remaining shareholders.
• A delivery van is purchased by a business to use in delivering product and picking up materials.
• A business called Show-Fleur offers private driving tours of local botanical gardens — all from the comfort of high-end limousines.
• Because contra asset accounts are used so frequently, it’s worth spending a little bit more time on them here, including common subtypes.

Everything You Need To Master Financial Modeling

It is especially important to track sales returns separately and on a trend line, since this can provide important evidence of problems with a company’s products that are causing customers to return goods. 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. The reason you show a contra asset on a balance sheet is so you can see the overall net balance of a particular asset and to give investors a more accurate look into your company’s financial activity. A delivery van is purchased by a business to use in delivering product and picking up materials. The company uses Straight-Line Depreciation to track the loss of value of the asset over time.

• For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance.
• Rather than pay this cost up-front and tie up a significant chunk of capital, Show-Fleur makes this purchase on credit with a 90-day due date after invoicing.
• If every single buyer had taken advantage of the early payment discount, the company would have provided roughly $10 thousand in discounts during that same timeframe.
• Keep reading to learn more about contra revenue accounts and what should go in them.
• Fortunately, the seat vendor offered an early payment discount of 5%, meaning that when Show-Fleur paid off its full credit note within the first 30 days, it recouped $30 thousand in savings.

Sales Allowances Account

In other words, its expected balance is contrary to—or opposite of—the usual credit balance in a revenue account. Home Depot reports net receivables and net property and equipment, implying that both are reduced by contra assets. We’ll need to dig into the footnotes to find out what the contra accounts are.

How to Present Contra Accounts on Financial Statements

Contra Account