On the sales side, the only difference is the fact that we would not track the change in inventory at the time of the sale. Let’s look at both entries together, since we already discussed the methodology. Again, the only difference is that we do not track the changes in inventory under the periodic system. By using a contra account, the company knows how much its sales were over the course of the year and how much was lost because of discounts and other items. This is good information for managers to have in order to make decisions about the effectiveness of company policy.
Why should one include contra accounts on a balance sheet?
Contra accounts such as these have a debit balance and are deducted from the total amount of a company’s revenue. When a specific bad debt is identified, the allowance for doubtful accounts is debited (which reduces the reserve) and the accounts receivable account is credited (which reduces the receivable asset). The purchases discounts normal balance is a credit, a reduction in costs for the business.
Chart of Accounts Listing of Typical Contra Accounts:
Do not jump right into the entries until you know what is happening in the transaction. Typically, a problem will state which company you should do the entries for. Go back through the transactions to see if the company is the buyer or seller. Read the transactions carefully or you may lose a lot of points on a problem you know how to do.
What is a Contra Revenue Account?
The biggest problem students have with this topic is confusing purchase and sale transactions. I have had students do the problem perfectly, except they give me the journal entries for the purchase when I ask for the sale or vice versa. Spend extra time if needed to make sure that you understand what the transaction actually means.
Accumulated Depreciation is a contra asset that pairs with Fixed Assets. Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset. A Fixed Asset is a Long-term Asset used by a company to create revenue.
- The Accounts Payable balance is now zero and the Inventory balance is $4,850 which matches what we actually paid for the inventory.
- Later, when a specific account receivable is actually written off as uncollectible, the company debits Allowance for Doubtful Accounts and credits Accounts Receivable.
- For example, a building is acquired for $20,000, that $20,000 is recorded on the general ledger while the depreciation of the building is recorded separately.
- This information directly affects a company’s gross and operating profit.
- 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.
Journal Entry
Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. Discount on Bonds Payable is a contra liability account with a debit balance that reduces the normal credit balance of its parent Bonds Payable liability account in order to present the net value of payables on a company’s balance sheet. Discount on Notes Receivable is a contra asset account with a credit balance that reduces the normal debit balance of its parent Notes Receivable asset account in order to present the net value of receivables on a company’s balance sheet. Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement. The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet.
Some textbooks may show you two different methods for recording the discount, one in which the discount is recorded at the time of the purchase and one where the discount is recorded at the time of the payment. When you record the discount at the time of the purchase and the discount is not taken because the buyer does not pay within the discount window, we must alter the payment entry to undo the discount taken in the first entry. By recording the discount at the time of the payment, we are only recording a discount that has actually been taken and we never need to undo something from the first entry. 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.
The credit balance in Notes Payable minus the debit balances in Discount on Notes Payable is the carrying value or book value of the notes payable. The difference between the gross balance of a main account and its contra accounts reported as the the contra account purchases discount has a normal debit balance. net balance in a company’s financial statements is also referred to as a book value, current value, carrying value, or net realizable value. Sales returns, sales allowance and sale discounts are different examples of contra revenue accounts.
An income statement is a financial statement that reveals how much income your business is making and where it is going. The net sales figure on an income statement shows how much revenue remains from gross sales when sales discounts, returns and allowances are subtracted. Revenue accounts carry a natural credit balance; purchase discounts has a debit balance as a contra account. On the income statement, purchase discounts goes just below the sales revenue account. The credit balance in the liability account Bonds Payable minus the debit balances in the contra-liability accounts Discount on Bonds Payable and Bond Issue Costs results in the carrying value or book value of the bonds.
Accounts receivable is an asset and has a debit balance, so doubtful accounts have a credit balance. (Remember, allowances are always the opposite of the account they are linked to!) Accounts receivable on the balance sheet is shown net of the allowance for doubtful accounts and is reported as net accounts receivable. A company might decide to purchase its stock when the board of directors feel the stock is undervalued or when it wishes to pay its shareholders dividends. The amount on the equity contra account is deducted from the value of the total number of outstanding shares listed on a company’s balance sheet.
