contra expense account definition and meaning

It carries a credit balance and is linked to the fixed asset account, which carries a debit balance. The accumulated depreciation account is designed to reduce the carrying value of the contra expense fixed asset account when depreciation is recorded at the end of each period. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation.

What is a Contra Liability?

Of that amount, it is estimated that 1% of that amount will become bad debt at some point in the future. This means that the $85,000 balance is overstated compared to its real value. At this point, it isn’t known which accounts will become uncollectible so the Accounts Receivable balance isn’t adjusted. Instead, an adjusting journal entry is done to record the estimated amount of bad debt.

Contra Account Example: Allowance for Doubtful Accounts

Contra revenue accounts typically offset revenue accounts in a firm’s income statement. For example, when a line item on your balance sheet presents the balance of accounts receivable, report the value of allowance of uncollectible accounts below the accounts receivable line. Be sure to enter the contra account on the opposite column of the account they’re offsetting. If contra assets appear in the credit column, record contra liabilities on side. If a company has receivables, this means it has made a sale on credit but has yet to collect the money from the purchaser. Remember that financial assets are deemed as having economic value, and can be expressed, in accounting terms, as cash.

• If a company has receivables, this means it has made a sale on credit but has yet to collect the money from the purchaser.
• Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet.
• A customer returned $100 worth of items, claiming them to be defective.
• Because of the matching principle of accounting, revenues and expenses should be recorded in the period in which they are incurred.
• As a reminder, assets and expenses are debit accounts whereas liabilities and revenues are credit accounts.

When to Use a Contra Expense Account

When a company returns goods to a supplier due to defects or other issues, the value of these returns is recorded in this account. This action reduces the total cost of goods purchased, ensuring that the expense reported on the financial statements reflects only the net cost of goods that were actually retained and used by the company. In practice, contra expense accounts are often used in various scenarios, such as purchase returns, allowances, and discounts received. For example, if a company returns defective goods to a supplier, the value of the returned goods is credited to a purchase returns and allowances account, a type of contra expense account. This reduces the total cost of goods purchased, thereby adjusting the expense to reflect only the net cost. Contra equity accounts are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds.

• To record these transactions, GadgetHub will create a contra expense account called “Purchase Discounts.
• Other examples include the allowance for doubtful accounts, discount on bonds payable, sales returns and allowances, and sales discounts.
• In financial accounting and finance, bad debt is the portion of receivables that can no longer be collected, typically from accounts receivable or loans.
• To oppose the revenue made by a company, contra revenue accounts must have a debit balance.
• Hence, the book value of the liability will be the credit balance of the liability account minus the debit balance of its contra liability counterpart.

This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders. The purpose of the Allowance for Doubtful Accounts is to track the reduction in the value of the asset while preserving the historical value of the asset.

Accumulated depreciation reflects the reduction in value of a fixed asset. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. These contra revenue accounts tend to have a debit balance and are used to calculate net sales. Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement.

• This depreciation is saved in a contra asset account called accumulated depreciation.
• 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.
• He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries.
• 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.
• They are used in case some customers won’t be able to pay the money they owe to the business.
• The offset to the Depreciation Expense account is Accumulated Depreciation.
• 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.

• Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
• Contra expense accounts are rarely used, because organizations find it to be easier to record third-party payments directly against an expense account.
• A contra account is an account with a balance opposite the normal accounts in its category.
• For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
• Assume that a company uses a contra expense account to record the amounts that employees paid toward the company’s health insurance costs.