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. Generally in the financial statements contra revenue account the revenue account would be offset against the contra revenue account to show the net balance. A contra revenue account is a revenue account that is expected to have a debit balance (instead of the usual credit balance).
Double Entry Bookkeeping
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. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.
Why Use a Contra Account?
The list of asset accounts on your general ledger and balance sheet conveys the combined, potential value of all of the tangible and intangible items that your organization possesses. But in the real world, converting all of that potential into hard cash is highly unlikely, if not impossible. Instead, you need to record this value gap, and a contra asset account serves that purpose. If a company offers an early payment discount (such as 1% or 2% of the invoice amount if it is paid within 10 days instead of the required 30 days) the amount of the discount is recorded in the contra revenue account Sales Discounts.
- Including contra accounts on a balance sheet is important as it allows for a more transparent view of a company’s financial position.
- The contra revenue account reflects the original amount, the discounted sale, and the resulting net sales for the company.
- On the other hand, if you’re looking at a high-flying growth stock that reports new revenue growth records each quarter but has a massive allowance for doubtful accounts, there may be problems ahead.
- We are better off subtracting the accumulated depreciation account (the contra account) from PPE cost account (the parent account) to arrive at the net balance of the PPE.
- So as values shift depending on real-world factors, rather than making deductions or adjustments to the original or “parent” account, you would record these changes in the contra account instead.
What is contra revenue, and how does it differ from gross and net revenue?
- Furthermore, if you subsequently pay off that debt early and capture a discount, the contra liability account — Discount Notes Payable — would record those savings.
- Treasury stock and owner’s drawing account are examples of contra equity accounts.
- Contra asset accounts are recorded with a credit balance that decreases the balance of an asset.
- While both affect your net income, they do so in different parts of your income statement.
- Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period.
Contra revenue accounts appear near the top of the income statement, as a deduction from gross revenue. If the amounts of these line items are minimal, they may be aggregated for reporting purposes into a single contra revenue line item. The revenue contra accounts Sales Returns, Discounts and Allowances are subtracted from the main Sales Revenue account to present the net balance on a company’s income statement. Make sure that you report contra accounts on the same financial statement as the related accounts. If you’re the one managing your company’s books of accounts, be sure to report the contra account on your financial statement on the line item directly beneath the main account. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.
The difference between an asset’s balance and the contra account asset balance is the book value. 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 it does not represent a future obligation.
Suppose Company A extends a two percent discount on the total amount for payments made within a week, deviating from the standard 30-day term. The company records the discounted portion in its contra account under Sales Discounts in this scenario. The contra revenue account reflects the original amount, the discounted sale, and the resulting net sales for the company.
Let’s go over how they work and what the main types are, and then finish with an example. Regular reviews and adjustments based on comprehensive data analysis can significantly aid in maintaining healthy profit margins. This means if you sold an item for $100 but gave a $10 allowance for a small scratch, you’d record $90 in net sales instead of the full $100. Wanting to spruce up its aging inventory, Show-Fleur purchased new, climate controlled-seats for its fleet, delivering increased comfort for 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.
A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. Here are some practical ways to lower contra revenue, improve your discount strategies, and make sure your policies match industry standards. 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. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. 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).
How to Record a Contra Account
The purpose of the Sales Returns account is to track the reduction in the value of the revenue while preserving the original amount of sales revenue. The purpose of the Owner’s Withdrawal account is to track the amounts taken out of the business without impacting the balance of the original equity account. In footnote 3, the company reports, “Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021.” Look at contra revenue management as a key part of your broader financial strategy. Focusing on these areas can help your business not only survive, but thrive, in today’s competitive market. Speaking of which, make sure you keep an eye on your competitors and industry best practices.