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The Jackson’s go back to the store with the $3,400 queen bed to exchange for a full size at a price of $1,900. Osman Ahmed is a member of WSO Editorial Board which helps ensure the accuracy of content across top articles on Wall Street Oasis. Osman started his career as an investment banking analyst at Thomas Weisel Partners… This content was originally created by member WallStreetOasis.com and has evolved with the help of our mentors. This first criterion means that the car will have a net value or book value of $0 once it is fully depreciated. The main reason is to make the remaining shares more valuable, as their prices are expected to rise after the stock buyback.
Again, the company’s management will see the original amount of sales, the sales discounts, and the resulting net sales. The purpose of a contra account is to accurately report value of operating performance and assets for a firm. A contra account is an account that records events like adjustments and transactions that are having an opposite effect on a relating account’s true value on the firm’s financial statements. If we record those events within the relating account, we risk losing information that is relevant to analyzing performance.
What Is A Contra Asset Account?
If you buy a pair of shoes from your supplier for $20, that’s a cost, but it’s not yet an expense. That’s because, as far as accounting is concerned, you haven’t really “spent” $20. You’ve just converted $20 worth of cash into $20 worth of shoes; an asset that remains in your inventory. Since you no longer have the shoes, aka the asset, you record a $20 expense on your income statement, But you also record $30 in revenue from the sale, so your net income is $10. Of course, you’ll also have to pay your employees’ wages, your rent, your utilities and other costs.
The bond is listed on the balance sheet at the full amount of $1,000, but the cash received is just $950, so a contra liability for the discount is listed to make the entry balance. 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. For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets. This type of account could be called the allowance for doubtful accounts or a bad debt reserve.
Definition of Contra Account
These contra revenue accounts tend to have a debit balance and are used to calculate net sales. Contra revenue is a type of account in financial accounting that offsets the balance of a corresponding revenue account. Contra revenue accounts have a debit balance, which is the opposite of the typical credit balance found in revenue accounts. The purpose of a contra revenue account is to reduce the total revenue shown on the income statement by reflecting specific adjustments, allowances, or returns related to the revenue.
When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense. The contra asset account carries a credit balance because an asset account usually has a debit balance. Such accounts are allowance for doubtful accounts and the accumulated depreciation account.
Is a Contra Balance Negative or Positive?
If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative. 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. Keep reading to learn more about contra revenue accounts and what should go in them. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.
Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value. A contra asset account is an account in the balance sheet that offsets the balance of a regular asset account. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. The contra equity account treasury stock is reported right on the balance sheet. Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period. In double entry bookkeeping terms, a contra revenue account or contra sales account refers to an account which is offset against a revenue account.
Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities includes discounts on notes or bonds payable. There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance.
- 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.
- Contra accounts are used to reduce the original account directly, keeping financial accounting records clean.
- The net value of both these figures is usually reported on a third line.
- To report the real value of the financial statement, you will need to record the amount you can reasonably estimate that will probably effect the financial statement classification.