Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets. In case the CA account is not listed in the balance sheet, it must be listed in the footnotes of the financial statement for the users to be informed. For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets.

Consider what would happen if you have sales on credit that you reasonably expect will not be paid. In the example of Homes Inc. the percentage of customers defaulting on the account, and the amount defaulted, is estimable and probable. Past experience with uncollected bad debt has been, on average, 10% of credit sales. The sale to the Johnson family will create a bad debt expense estimate of 10% of the amount receivable.

What Is a Contra Account?

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. Transactions made to contra accounts are presented on a company’s financial statements under the related account. Contra accounts are important because they allow a company to follow the matching principle by recording an expense initially in the contra asset account. The contra asset account is later reduced when the expense is recorded. Business owners should understand the functions of contra accounts and their importance to maintaining accurate financial records.

Emilie is a Certified Accountant and Banker with Master’s in Business and 15 years of experience in finance and accounting from corporates, financial services firms – and fast growing start-ups. 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). Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. Advisory services provided by Carbon Collective Investment LLC (“Carbon Collective”), an SEC-registered investment adviser. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns. The money left over after a company supports operations can be a snapshot of its financial health.

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Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees. Contra accounts are also applicable for Income Statement accounts. These accounts have to be closed at the end of the accounts period in the same way as the main Income Statement accounts are being closed.

Contra accounts are additional accounts that are maintained to bring more accuracy to the financial statement of a company. They are used to keep track of the historical cost https://www.vizaca.com/bookkeeping-for-startups-financial-planning-to-push-your-business/ of assets instead of reducing the value of an asset. Another example of a contra account is a discount allowed account, which is the contra account to revenue account.

Contra Account Definition, Types, and Example

Sales returns occur when customers return defective, damaged, or otherwise undesirable products to the seller. Sales allowances occur when customers agree to keep such merchandise in return for a reduction in the selling price. At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset.

The company would see the original amount, discounted sale, and net sales in the contra revenue account. 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. As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find.