Contra Account Definition + Journal Entry Examples

Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period. An asset that is recorded as a credit balance is used to decrease the balance of an asset. This account is not classified as an asset since it does not represent a long-term value. It is not classified as a liability since it does not constitute a future obligation. By providing a clear and transparent mechanism to account for adjustments, these accounts enable stakeholders, including investors and creditors, to better understand a company’s financial health. The revenue contra accounts Sales Returns, Discounts and Allowances are subtracted from the main Sales Revenue account to present the net balance on a company’s income statement.

How to Calculate Units of Activity or Units of Production Depreciation

With the right tools and the wisdom of the community, managing contra accounts becomes a seamless part of your accounting routine. Those who are struggling with recording contra accounts contra expense account may benefit from utilizing some of the best accounting software currently available. On the income statement, the net cost of goods sold will be reported as $98,000 ($100,000 – $2,000), reflecting the impact of the purchase discount. A delivery van is purchased by a business to use in delivering product and picking up materials. The company uses Straight-Line Depreciation to track the loss of value of the asset over time.

• The amount is not reported, and the net sales amount is reported on the income statement.
• Contra assets give investors a better picture of how you use your assets over time.
• 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.
• The presence of contra expense accounts significantly influences the presentation and interpretation of financial statements.
• Examples of a contra revenue accounts include sales returns, sales discounts, and sales allowances.

What Is a Contra Account?

These discounts are recorded in a contra expense account, which offsets the original expense recorded for the purchase. By doing so, the company can accurately report the net expense, showcasing effective cost management and benefiting from favorable payment terms. Contra expense accounts are specialized accounts used to record reductions in specific expense categories, providing a clearer view of net assets = liabilities + equity expenses. These accounts are typically paired with a corresponding expense account, allowing for a more detailed and accurate representation of financial activities.

Accumulated Depreciation as a Contra Asset

He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. When the two balances are offset against each other they show the net balance of both accounts. The purpose of the Accumulated Depreciation account is to track the reduction in the value of the asset while preserving the historical cost of the asset. When researching companies, the financial statement is a great place to start. Home Depot also devotes footnote 4 to its share repurchase program and reports that the company is authorized by its board to repurchase $20 billion in shares.

• These discounts are recorded in a contra expense account, which offsets the original expense recorded for the purchase.
• Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset.
• Companies like to depreciate assets as quickly as possible to get the tax savings, so the balance sheet may not state the true value of fixed assets.
• For example, if a company returns defective goods to a supplier, the value of the returned goods is credited to a purchase returns and allowances account, a type of contra expense account.
• If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative.
• It plays a vital role in maintaining the accuracy and transparency of a company’s financial statements.
• Contra revenue accounts are the dedicated detectives tracking down all the subtractions from a company’s gross revenue.

FAR CPA Practice Questions: Calculating the Carrying Amount of Finite-Lived Intangible Assets

For the past 52 years, https://www.bookstime.com/ Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.

There can be hidden value in stocks that have a lot of fully depreciated buildings. Companies like to depreciate assets as quickly as possible to get the tax savings, so the balance sheet may not state the true value of fixed assets. 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. 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.