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. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. A major example of a contra account is the accumulated depreciation. Again, accumulated depreciation reduced fixed and capital asset balances.

Even though a contra asset account shows negative or zero balances in credits within the account, it can still be advantageous for businesses to show any contra asset accounts they currently have within their balance sheets. The following are several key reasons why it can be important to include contra asset accounts on a balance sheet.

Contra Revenue Account

A classic example of this equity account is the portfolio of bonds that the company has invested in. Profit & loss due marked to the market value of this portfolio can be determined in other comprehensive income. Once the bonds have matured or sold the realized gain/loss is moved into net income. For the current year, the company has earned a profit of $10,000 and decided to pay $2000 in dividends. So the ending retained earnings for the year will be equal to $108,000 ($100,000 + ($10,000 – $2000)). For example, 10 million shares with $1 of par value would result in $10 million of common share capital on the balance sheet. Equity, which can also be called net assets, is the amount that is left after paying the business’s total liabilities.

These stocks are kept as treasury stocks instead of canceling them, a company can sell them. A contra asset account is a type of asset account where the account balance may either be a negative or zero balance. This type of asset account is referred to as “contra” because normal asset accounts might include a debit, or positive, balance, and contra asset accounts can include a credit, or negative, balance.

Accounting Topics

The lender may offer the company a discount if it repays the note early. The discount on notes payable reduces the total amount of the note to reflect the discount given by the lender.

For example, sales returns and allowance and sales discounts are contra revenues with respect to sales, as the balance of each contra is the opposite of sales . To understand the actual value of sales, one must net the contras against sales, which gives rise to the term net sales . Contra revenue is a general ledger account with a debit balance that reduces https://xero-accounting.net/ the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement. Examples of revenue contra accounts are Sales Discounts, Returns and Allowances. The contra revenue accounts commonly used in small-business accounting include sales returns, sales allowance and sale discounts.

What is a contra asset account?

By viewing the balance sheet with a comparable period, you will maximize the potential insight to be gained from these and other pieces of information. A distribution of assets to shareholders is referred to as a ______________. The cash received owner distribution contra account is allocated to each security based on the number of shares issued. The amount of net assets that were not available for distribution to shareholders. Report the additional expenses of the company that were not accrued during the year.

The preferred stocks have the characteristics of both debt security and common stock. Preferred stockholders do not have the voting rights, but they are usually guaranteed by cumulative dividend, which means the dividend can be accrued until paid off. For example, a company didn’t pay dividends for two years because of profitability versus debt ratios but offers a $5 cumulative dividend this year.

Types of Equity Account (With Definitions and Examples)

Allowance for doubtful accounts reduce accounts receivable, while accumulated deprecation is used to reduce the value of a fixed asset. It’s important to note that there is another type of account often found on the balance sheet. They are “contra accounts.” Contra accounts are those accounts that are opposites of other accounts on the balance sheet. They give the rest of the transaction story regarding a specific balance sheet account. Common “contra” accounts include accumulated depreciation, which is the contra account to the company’s vehicle, equipment or other property valuation. There are six main types of equity accounts which are common stock, preferred stock, additional paid-in capital, treasury stock, comprehensive income, and retained earnings. An accumulated depreciation account is a type of contra asset account that is used for recording the amount of depreciation a fixed asset evolves through.

• Examples include the owner’s drawing account, a dividend account, and the treasury stock account.
• There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue.
• It’s important to note that there is another type of account often found on the balance sheet.
• Business owners should understand the functions of contra accounts and their importance to maintaining accurate financial records.
• For example, a company issues 100,000 $5 par value shares for $10 per share.
• As the internal loan is repaid, the shares will be released and allocated to employee accounts within the ESOP.

There are several types of equity accounts illustrated in theexpanded accounting equationthat all affect the overall equity balance differently. A contra account is an account with a balance opposite the normal accounts in its category. Contra accounts are usually linked to specific accounts on thebalance sheetand are reported as subtractions from these accounts. In other words, contra accounts are used to reduce normal accounts on the balance sheet.

It’s important to note the assets held by the ESOP—leveraged or nonleveraged—aren’t included on the company’s balance sheet. Instead, ESOP assets are required to be held separately in a trust that’s administered by a trustee with fiduciary responsibilities under theEmployee Retirement Income Security Act of 1974. The financial statement that summarizes revenues and expenses for a specific period of time, usually a month or a year. This statement is also called a Profit and Loss Statement or an Operating Statement. Thus retained earnings are said to be part of net profit after deducting the dividend to be paid to the shareholders. It will accumulate over time to utilize them for Future funding consequences, which may arrive in the corporation at any point in a future date.