During the inventory, real data must be established for all accounting accounts (balance sheet items) on the corresponding date. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. By creating the Sales Discount account, the company can provide context to their revenue figures and better understand trends in the marketplace. Additionally, by staying on top of their financial records, contra revenue meaning the company can make more informed business decisions, particularly when it comes to managing cash flow, forecasting, and taking advantage of incentives for customers. It usually has a debit balance and is a helpful tool for the company to know the product specifications, whether it is optimum or not, as per customer requirements. All in all, contra accounts are an important tool for businesses to use to understand their financial standing better.
Conclusion for Contra in Accounting
- When a contra asset account is first recorded in a journal entry, the offset is to an expense.
- 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.
- They ensure that financial statements adhere to standardized accounting practices, enhancing the credibility and comparability of financial reports.
- Most accounts receivable would just be the time between purchase and credit card settlement.
- Angela is certified in Xero, QuickBooks, and FreeAgent accounting software.
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. A comprehensive way to determine the correctness of accounting in an organization is to compare the results of inventory with accounting data on the corresponding date. As you know, inventory should cover not only checking inventory, but also all assets, liabilities, etc.
Use of Accounting Software
This article will give you the definition of contra in accounting, talk about different contra accounts, and give examples. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account. The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold.
Examples
As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find. Companies bury them in the footnotes and often don’t break out the actual calculation. Still, it is important when possible to consider how the net accounts are calculated and be wary of companies that are reporting a ton of bad debts. When looking at the balance sheet, it is essential to understand what is being shown on the two sides – the assets debit balance and the liabilities credit balance.
Related AccountingTools Courses
The balance is held as a current liability (credit) on the balance sheet of the business. In double entry bookkeeping terms, a contra revenue account or contra sales account refers to an account which is offset against a revenue account. Imagine a company that offers an early payment discount to its customers, reducing their invoiced amount by 5% if paid within one week of invoicing.
Types of Contra Accounts for Revenues
These accounts can be listed based on the respective asset, liability, or equity account to reduce their original balance. They are crucial for compliance with generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). They ensure that financial statements adhere to standardized accounting practices, enhancing the credibility and comparability of financial reports. It is linked to specific accounts and is reported as reductions from these accounts. 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.
Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock. Pilot provides bookkeeping, CFO, and tax services for literally thousands of startups and growing businesses. To talk to an expert on our team and find out what Pilot can do for you, please click “Talk to an Expert” below, or email us at
The net amount is often referred to as the carrying amount or perhaps the net realizable amount. ABC Computers makes sales of 90,000; unfortunately, due to a fault in a product, they received returns of 2,500. The sales will still show a sales credit on the profit and loss of 90,000, but there is also a contra returns account with a debit of 2,500.