Contra Expense Accounts: Understanding the Basics

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. In accounting, refunds are handled through a contra-revenue account known as the sales returns and allowances account, reports Accounting Coach. When you issue a refund, you make a refund double entry, which means you must adjust two separate accounts in your records. Contra asset accounts adjust the value of a company’s assets to provide a more accurate depiction of their worth. Accumulated depreciation systematically reduces the book value of tangible assets like equipment and buildings over their useful lives, ensuring compliance with GAAP and IFRS requirements to match expenses with revenues. The allowance for doubtful accounts estimates the portion of accounts receivable that may not be collected, often calculated using historical data and industry averages.

The net effect of the two accounts is a reduced total benefits expense for the company. An example of a contra liability account is the bond discount account, which offsets the bond payable account. A contra liability account is not classified as a liability, since it does not represent a future obligation.

What are examples of contra revenue accounts?

Examples of contra expense accounts include Purchase Returns, Purchase Discounts, and Advertising Reimbursements. The cost of goods sold (COGS) account will have a debit balance of $100,000, representing the initial cost of the inventory. The purchase discounts account will have a credit balance of $2,000 (2% of $100,000), which represents the discount received from the supplier. Contra expense accounts play a crucial role in financial accounting, offering a nuanced way to track and report reductions in expenses. These accounts are essential for providing a more accurate picture of an organization’s financial health by offsetting specific costs. The contra asset account Accumulated Depreciation is deducted from the related Capital Assets to present the net balance on the parent account in a company’s balance sheet.

What is a Contra Liability?

Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a creditbalance. A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity). 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.

In other words, any entry which affects both cash and bank accounts is called a contra entry. 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. Contra expense accounts are not commonly used, as many organizations prefer to record third-party payments directly against an expense account for simplicity. Of that amount, it is estimated that 1% of that amount will become bad debt at some point in the future. At this point, it isn’t known which accounts will become uncollectible so the Accounts Receivable balance isn’t adjusted. Instead, an adjusting journal entry is done to record the estimated amount of bad debt.

• Although expense contras are used less frequently than other contra accounts, they are especially useful when accounting for large volumes of reimbursements.
• Purchase returns, allowances and discounts are all examples of contra expense accounts.
• Assume that a company uses a contra expense account to record the amounts that employees paid toward the company’s health insurance costs.

How Does a Contra Account Work in Accounting?

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. A company receives rebates for advertising it does on behalf of brands it carries in its stores. For example, a grocery store displays advertisements for a national brand in its weekly flyer. The national brand gives the grocery store cash, reducing the overall cost of printing the flyer. Analyze sales patterns, customer behavior, and profitability metrics to inform your decisions.

• When the company pays the cost of having the flyer printed, a journal entry is done.
• Contra revenue, on the other hand, directly reduces the sales figures reported on your financial statements.
• As a small business owner, a thorough understanding of your financial processes is paramount.
• These accounts are critical for understanding changes in shareholder value and making informed decisions about capital structure and dividend policies.

Integrating Contra Expense Accounts into Your Income Statement

When an employee submits a travel expense report, the company records a debit to the Travel Expense account (Account 5300) for $15,000 to reflect the full cost incurred. If employees personally cover a portion of the price and later request reimbursement, the company records the amount withheld or reimbursed in a contra-expense account. In essence, contra-expense accounts are instrumental in ensuring the integrity of your financial statements and facilitating compliance with accounting standards.

How Are Contra Accounts Reported in Financial Statements?

Without contra revenue accounts, businesses would show inflated revenue figures, which would misrepresent their true financial performance. Expense accounts are technically contra equity accounts because they are linked to another equity account, revenue, and maintain an opposite balance. The expense account uses its debit balance to reduce the revenue account’s credit balance. A contra expense account, on the other hand, offsets a related expense account by recording reimbursements, reductions, or cost-sharing arrangements. Contra expenses are recorded as credits, reducing the total reported expense on the income statement.

The company’s income statement will report the combination of the amounts in accounts 4210 and 4211 in order to show the company’s actual expense of $8,000 ($10,000 minus $2,000). Contra equity accounts adjust the equity section contra expense of the balance sheet, reflecting changes in ownership interest. Treasury stock is a common contra equity account, representing shares repurchased from shareholders.

Another description of a contra expense account is an account that reduces or offsets the amounts reported in another general ledger expense account(s). As can be seen using the two accounts, allows information about the original sale to be maintained on the revenue account, and details of the sale returns to be maintained on the sales returns contra revenue account. It is located in the long-term asset section of the balance sheet under the heading of property, plant, and equipment. An expense account records costs incurred by a business for operations, such as rent, utilities, and salaries. If the company requires employees to pay $3,000 upfront for certain travel expenses before reimbursement, it will credit a contra expense account (Account 5301 Employee Travel Reimbursements) for $3,000.

In double entry bookkeeping terms, a contra expense account refers to an account which is offset against an expense account. This article will explain what contra revenue is, how to record it accurately, and some effective management strategies. We’ll also touch on related topics like gross vs. net profit, prepaid expenses, and unearned revenue.

Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees. Schedule regular reviews of your allowance and discount policies so they remain competitive and relevant to your market conditions. This might mean adjusting your strategies based on seasonal trends, customer feedback, or new market entrants. This means if you sold an item for $100 but gave a $10 allowance for a small scratch, you’d record $90 in net sales instead of the full $100. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers.