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The main contra equity account is treasury stock, which is the balance of all stock repurchased by the company. When a company repurchases shares, it increases the fractional ownership of all remaining shareholders. A contra equity account reduces the total number of outstanding shares listed on a company’s balance sheet.
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. Sales discounts, returns, and allowances are recorded in contra revenue accounts instead of directly in the Sales account to track their use.
Why are Contra Accounts Important?
In order to balance the journal entry, a debit will be made to the bad debt expense for $4,000. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for doubtful https://accounting-services.net/ accounts is $4,000, the net book value reported on the balance sheet will be $36,000. Then, credit the sales revenue account by the same amount in the same journal entry. The accounts receivable as an asset account increase by the debit entry and the sales revenue unlike an asset account increases by a credit entry.
Examples of contra accounts include allowance for doubtful accounts, reserve for obsolete inventory, and accrued liabilities. Each of these accounts helps to offset another account on the balance sheet. Some of the most common contra assets is sales discount a contra account include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find.
Contra revenue account
Sales Discounts and Sales Returns and Allowances are contra-revenue accounts meaning they are REVENUE accounts but debits will increase and credits will decrease. In short, it is not difficult to understand why the contra revenue has the opposite balance.
Is sales discount expense an account?
Sales discounts (along with sales returns and allowances) are deducted from gross sales to arrive at the company's net sales. Hence, the general ledger account Sales Discounts is a contra revenue account. Sales discounts are not reported as an expense.