What is a contra expense account? AccountingCoach

The contra account will be a sub account of the expense account, and I will be manually entering the correcting journal entries. I’ll have to do it this way because the reimbursements were originally mis-catagorized as income, which violates GAAP. QB itself isn’t set up to handle something like this on its own, so manual entries is the only way I know of to take care of it. I strongly suggest having a trained Accountant do this (or something in a similar vein) if you need it done for your business. 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. Another description of a contra expense account is an account that reduces or offsets the amounts reported in another general ledger expense account(s).

Contra Account

He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. Now comes the tricky part (at least for me in this particular case). Since I want to record third-party vendors services provided to me that are a part of the direct cost of providing the service I sell to my customers, I am going to create a Product / Service that I buy (not sell) and map it to the COG Account I just created.

Contra liability accounts

The difference between the gross balance of a main account and its contra accounts reported as the net balance in a company’s financial statements is also referred to as a book value, current value, carrying value, or net realizable value. The contra asset account Accumulated Depreciation is deducted from the related Capital Assets to present the net balance on the parent account in a company’s balance sheet. The following are examples of contra expense accounts used in double entry bookkeeping. In this example, the contra expense account (Purchase Discounts) is used to provide a more accurate and detailed representation of the company’s expenses, allowing for better financial analysis and decision-making.

Is the Matching Concept Related to the Cash Accounting or the Accrual Accounting for a Business?

When the two balances are offset against each other they show the net balance of both accounts. For example, suppose a business has an amount of 1,000 owed by a customer for services provided on account, but also has an amount of 200 due to a supplier (in this case the customers business) for goods it has purchased. When the company pays the cost of having the flyer printed, a journal entry is done. 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.

• Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting.
• Of that amount, it is estimated that 1% of that amount will become bad debt at some point in the future.
• Allowance for Doubtful Accounts pairs with the Bad Debts Expense account when doing adjusting journal entries.
• Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement.

• The net amount is often referred to as the carrying amount or perhaps the net realizable amount.
• You can use contra accounts to record the goods your customers return, inventory that gets damaged, and equipment depreciation.
• Hence, the “Accounts Receivable, net” line item on the balance sheet adjusts for the allowance to display a more realistic value of A/R and the cash payments to be received, so investors are not misled or caught off guard by sudden decreases in a company’s A/R.
• The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable.

For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. The information provided Contra Expense Account by my colleague above is to set up an account within QuickBooks Online (QBO). In regards to your concern, the Accumulated Depreciation will not automatically set as a contra account in QBO.

Contra Expense

The benefit of using the contra expense account is that the company’s managers can see in account 4210 the total amount that the company paid to the health insurance company. Then in account 4211 they can see the portion of the cost that was paid by the employees. The company’s income statement will report the combination of the amounts in accounts 4210 and 4211 in order to show the company’s actual expense of $8,000 ($10,000 minus $2,000). If there’s an increase to allowance for uncollectible accounts, you record the same amount in the bad debt expense of your income statement. Similarly, accumulated depreciation accounts reduce the value of the fixed assets you report on your financial statements. Contra liability, equity, and revenue accounts have natural debit balances.

Definition of Contra Account

A contra account is a general ledger account with a balance that is opposite of the normal balance for that account classification. The use of a contra account allows a company to report the original amount and also report a reduction so that the net amount will also be reported. The net amount is often referred to as the carrying amount or perhaps the net realizable amount. To record these transactions, GadgetHub will create a contra expense account called “Purchase Discounts. GAAP, the allowance for doubtful accounts represents management’s estimate of the percentage of “uncollectible” accounts receivable (i.e. the credit purchases from customers that are not expected to be paid).

Sales Allowances

The net balance of the accounts shows the net value of the purchases made by the business for the accounting period. Examples of a contra revenue accounts include sales returns, sales discounts, and sales allowances. You debit the contra revenue accounts and credit the corresponding revenue accounts. For example, when you debit the balance in sales returns account, make sure that you offset the sales revenue account with a credit balance.

• Since I want to record third-party vendors services provided to me that are a part of the direct cost of providing the service I sell to my customers, I am going to create a Product / Service that I buy (not sell) and map it to the COG Account I just created.
• For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets.
• The accounts normally have a credit balance and in use are offset against the purchases account which is normally a debit balance.
• Contra accounts allow you to show the amounts that offset a paired related account.
• At this point, it isn’t known which accounts will become uncollectible so the Accounts Receivable balance isn’t adjusted.
• You debit the contra revenue accounts and credit the corresponding revenue accounts.
• The amount due from the customer has been posted to the accounts receivable ledger, whereas the amount due to the supplier is posted to the accounts payable ledger.

Asset Contra Account

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. On the income statement, the net cost of goods sold will be reported as $98,000 ($100,000 – $2,000), reflecting the impact of the purchase discount. An expense account which is expected to have a credit balance instead of the typical debitbalance. The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet.

When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. Although the car is normally an asset because you can sell it for parts or use it for your business, when the car depreciates to a zero or negative balance, it is a contra asset on your balance sheet.