Taken together, the asset account and contra asset account reveal the net amount of fixed assets still remaining. A contra asset account is not classified as an asset, since it does not represent long-term contra revenue value, nor is it classified as a liability, since it does not represent a future obligation. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean.

• Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc.
• Including contra accounts on a balance sheet is important as it allows for a more transparent view of a company’s financial position.
• For example, if the balance of accumulated depreciation increases from $20,000 to $50,000, this means that the depreciation expense amounts to $30,000, which will be listed in the income statement.
• For example, when the credit amount in allowance for doubtful accounts increases, it is also recorded in the bad debt expense as a debit increase.

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Contra liabilities

Better yet, consider investing in AI-powered accounting software to reduce mistakes. It's normal for businesses to receive refund requests or returns from customers. Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University. Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees.

• A contra account is a general ledger account with a balance that is opposite of the normal balance for that account classification.
• The balance sheet will show a gross fixed assets value, a contra account value for accumulated depreciation, and a net value.
• A contra expense account is an account used to reduce the amount of an expense without changing the balance in the main expense account.
• Companies bury them in the footnotes and often don't break out the actual calculation.

Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. In bookkeeping, a contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit (negative) balance. The account offsets the balance in the respective asset account that it is paired with on the balance sheet. Let’s consider a fictional example of a small clothing retail business called “StyleMart” to illustrate the use of contra revenue accounts in financial accounting.

Types of Contra Account

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In other words, contra revenue is a deduction from gross revenue, which results in net revenue. The sales allowance shows the discounts given to customers when returning the product. This is done to entice customers to keep products instead of returning them. The most common contra equity account is called “treasury stock.” This special account decreases the number of shares outstanding in the market because the company repurchases some of the shares from its buyers. Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks. Note that the contra liability account has a positive balance (a debit balance), and the liability account normally has a credit balance.

The Eight Steps Of The Accounting Cycle

The amount is not reported, and the net sales amount is reported on the income statement. The sales discounts account contains the amount of sales discounts given to customers, which is usually a discount given in exchange for early payments by them. When the original dollar amount is kept in the original account and a separate account is used for recording the deduction, the resulting financial information becomes more transparent and helpful for stakeholders. 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.

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Examples of Contra Revenue Accounts

Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods. In this scenario, a write-down is recorded to the reserve for obsolete inventory. The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline. Keep reading to learn more about contra revenue accounts and what should go in them. It is important to realize that unearned revenue is not a contra revenues account.