contra expense account definition and meaning
They are expenses that are offset against revenue, reducing the total amount of income reported on a company’s financial statement. 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. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. A contra expense is an account in the general ledger that is paired with and offsets a specific expense account.
Their purpose is not to disclose when you account for something inconsistently. In response to Wayne’s post, a positive margin is not a requirement for revenue recognition in any existing accounting literature. Actually, EITF specifically states that expense reimbursement related to providing services is to be presented as revenue, even if there is no margin.
What are the Five Types of Contra Accounts?
While revenue increases a company’s net income, contra expense reduces it. Furthermore, revenue is reported on the income statement while contra expense is not. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory.
- Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance.
- Companies bury them in the footnotes and often don’t break out the actual calculation.
- Revenue is an income statement account, but it flows through to the equity section of retained earnings as well.
- They can be used to create a running total of what is owed or received from third parties and can be used to balance the books.
- Contra accounts appear in the financial statements directly below their paired accounts.
To drum up interest in the bond, the company will sell it at a discount. For example, a bond with a principal amount of $1,000 may be sold for only $950. 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.
Contra Account Definition in Accounting
In other words, this account’s credit balance is contrary to (or opposite of) the usual debit balance for an expense account. Revenue is the income generated by a business through the sale of goods or services. Contra expense, on the other hand, is an expense that is offset against income in the same accounting period. It is a type of internal transaction that does not appear in the income statement. A contra expense is an account in the general ledger that offsets a specific expense account. It is used when a company initially pays for an expense item and is then reimbursed by a third party.
However, that $1.4 billion is used to reduce the balance of gross accounts receivable. Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount. For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. Another description of a contra expense account is an account that reduces or offsets the amounts reported in another general ledger expense account(s).
What is a Contra Liability?
Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. The credit balance in the liability account Bonds Payable minus the debit balances in the contra-liability accounts Discount on Bonds Payable and Bond Issue Costs results in https://www.bookstime.com/articles/virtual-bookkeeping the carrying value or book value of the bonds. The credit balance in Notes Payable minus the debit balances in Discount on Notes Payable is the carrying value or book value of the notes payable. The difference between the gross balance of a main account and its contra accounts reported as the net balance in a company’s financial statements is also referred to as a book value, current value, carrying value, or net realizable value.
Examining a trend line of the monthly additions to a contra expense account is a good way to determine whether any third party payments were not made to the company, or if two of these payments were incorrectly recorded within the same month. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete. 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.