Another example is for industries that rely on natural resources such as mining, oil, gas, or logging, the depletion process is used to track the extraction of the natural resource, which is gradually exhausted over time. This process calculates the decline in value of the natural resource and offsets it against the initial appraisal of the land where contra expense account the resource is being extracted from. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees.
- Inscrutable Corporation offers long-term disability insurance to its employees under an arrangement in which it pays for the insurance, and then participating employees reimburse it for half of this cost.
- Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement.
- Understanding how contra expense accounts function is vital for anyone involved in financial management or analysis.
- The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.
- Allowance for doubtful accounts is netted from the accounts receivable balance.
- A contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability.
Example #2: Asset Contra Account
Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. In footnote 3, the company reports, “Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021.” In other words, contra revenue is a deduction from gross revenue, which results in net revenue. And let’s not forget the all-important Allowance for Doubtful Accounts, acting as a financial crystal ball that estimates the portion of accounts receivable that might just turn into fairy dust. Businesses benefit by forecasting more realistic revenue figures, which helps in strategic planning and maintaining investor confidence. A contra account is an account listed within a general ledger with the purpose of capturing the reduced value of a paired or related account when the two are added together.
- Optimizing your handle on contra accounts doesn’t end with just understanding them; it’s about mastering the tools and techniques to manage them effectively.
- The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation.
- This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms.
- Contra accounts allow you to show the amounts that offset a paired related account.
Trial Balance
From studying the basics of debit and credit, balance sheet accounts have a healthy balance. These accounts facilitate auditing and financial analysis by providing a detailed breakdown of adjustments made during a specific accounting period. This information assists auditors, and financial https://www.bookstime.com/ analysts in evaluating a company’s financial performance and risk exposure. By creating the Sales Discount account, the company can provide context to their revenue figures and better understand trends in the marketplace.
- Baking in room for bad debt, asset depreciation, and returned goods means fewer surprises and more confident stakeholders.
- All three values can be useful for investors depending on what they’re looking for.
- As a small business owner, understanding how to set up contra accounts enables you to prepare and maintain accurate financial records.
- A liability recorded as a debit balance is used to decrease the balance of a liability.
- These accounts facilitate auditing and financial analysis by providing a detailed breakdown of adjustments made during a specific accounting period.
- In reality, the actual number of company discounts came closer to $2 thousand.
Accumulated Depreciation as a Contra Asset
A contra expense account is a general ledger expense account that will intentionally have a credit balance (instead of the debit balance that is typical for an expense account). In other words, this account’s credit balance is bookkeeping contrary to (or opposite of) the usual debit balance for an expense account. A normal asset has a debit balance, while a contra asset sits against this to show the net balance of both assets on your financial statement. Home Depot reports net receivables and net property and equipment, implying that both are reduced by contra assets. We’ll need to dig into the footnotes to find out what the contra accounts are.
Difference Between Depreciation, Depletion, Amortization
Assume that a company uses a contra expense account to record the amounts that employees paid toward the company’s health insurance costs. For instance, the company might debit its expense account 4210 Employee Health Insurance Expense when recording the insurance company’s invoice of $10,000. If the company withholds $2,000 from its employees’ wages to pay part of the cost of the insurance, the company will credit its contra expense account 4211 Employee Withholdings for Health Ins.
