What is a contra expense account?

contra expense

In these situations, the funds received from the other party should be recorded as a reimbursement of expenses and not as revenue. Revenue should only be recorded as the result of revenue-generating activities, like providing a good or service. If the company policy is to mark-up expenses (whether or not a particular reimbursable expense has been marked up), then that is revenue and I would agree with one exception. You need to record the expenses as a COGs account, otherwise you would still be misleading your financial readers and skewing the measurements. However, taxes and fees would be correct if they are based on revenues.

contra expense

By using contra expense accounts, financial statement users can gain a more accurate and detailed understanding of the company’s expense structure, allowing for better financial analysis and decision-making. The benefit of using the contra expense account is that the company’s managers can see in account 4210 the total amount that the company paid to the health insurance company. Then in account 4211 they can see the portion of the cost that was paid by the employees. 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 expense accounts have a natural credit balance, as opposed to the natural debit balance of a typical expense account.

What Is the Difference Between a Sales Return & a Sales Allowance?

Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts reduce accounts receivable, while accumulated deprecation is used to reduce the value of a fixed asset. In order to balance the journal entry, a debit will be made to the bad debt expense for $4,000. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns.

  • Contra accounts are shown in the financial statements below the paired accounts, although sometimes the balances of the two accounts are merged to a net amount for presentation purposes.
  • For example, when the credit amount in allowance for doubtful accounts increases, it is also recorded in the bad debt expense as a debit increase.
  • When combined, the AR account and the allowance for doubtful accounts contra assets offer a projection of how much net cash is expected to be received from outstanding accounts.
  • Contra equity accounts carry a debit balance reduce equity accounts.
  • This contra account holds a reserve, similar to the allowance for doubtful 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.
  • If people are randomly polluting the discussion with intentionally bad information, just to get a reaction from other posters, it defeats the purpose of these forums, and makes us all sound less credible.

If you buy a pair of shoes from your supplier for $20, that’s a cost, but it’s not yet an expense. That’s because, as far as accounting is concerned, you haven’t really “spent” $20. You’ve just converted $20 worth of cash into $20 worth of shoes; an asset that remains in your inventory. https://www.bookstime.com/articles/contra-expense Since you no longer have the shoes, aka the asset, you record a $20 expense on your income statement, But you also record $30 in revenue from the sale, so your net income is $10. Of course, you’ll also have to pay your employees’ wages, your rent, your utilities and other costs.

How to Calculate Straight Line Depreciation

Clearly the $1,000 is being received to offset the costs incurred by Company A. I say Company A should reduce the expenses as recorded on their books, in order to reflect the true cost of establishing the partnership. Money paid to an employee under an accountable expense account is not treated as taxable income to the employee; Where as money paid to an employee under an unaccountable plan is treated as income to the employee. Business expenses paid out of a nonaccountable plan are deductible from the employee’s taxable income only as miscellaneous itemized deductions, and even then, they are only deductible if the expenses are equal to or greater than 2% of the employee’s income.

For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately. 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. Contra accounts are used to help a company report the original amount of a transaction as well as reductions that may have happened.

Contra Account: A Complete Guide [+ Examples]

And it is the only time in this thread that I have been nitpicky. But I do believe attention to detail is important, and I know that other people will judge you based on your grammar and spelling, particularly when they are germane to the argument you’re making. Alas, it’s just my own (again) attention to detail and OCD flaring up. Contra accounts subtract from the value of a related account. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com.

What is a contra current asset?

A contra asset account is an asset account where the account balance is a credit balance. It is described as "contra" because having a credit balance in an asset account is contrary to the normal or expected debit balance. (A debit balance in a contra asset account will violate the cost principle.)

There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra liabilities reduce liability accounts and carry a debit balance. Contra equity accounts carry a debit balance reduce equity accounts.

How to Record a Contra Account

A copy of Carbon Collective’s current written disclosure statement discussing Carbon Collective’s business operations, services, and fees is available at the SEC’s investment adviser public information website – or our legal documents here. Normal capacity is the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. Some variation in production levels from period to period is expected and establishes the range of normal capacity.

  • Contra liability accounts are not as popular as contra asset accounts.
  • Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements.
  • This type of reporting allows anyone analyzing the balance sheet to understand much more about the company and its assets than if they were to simply look at the net value of the depreciated asset.
  • It is not classified as a liability since it does not represent a future obligation.
  • Expenses are the expenditure of the company done to acquire an asset or a service.

The reader also is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein. As I understand the post, Company A is NOT a customer or client of Company B. Company A and B entered into a project (partnered up). While the phrase “to meet the requirement of Company B” is stated, I understood it to mean that there were NO services rendered by Co.

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