How do I set up a contra account or control the natural balance of a GL account in Quickbooks Online?

By Last updated Aug 29, 2024

Accruing tax liabilities in accounting involves recognizing and recording taxes that a company owes but has not yet paid. This is important for accurate financial reporting and compliance with… When the company pays the cost of having the flyer printed, a journal entry is done. The purpose of the Sales Returns account is to track the reduction in the value of the revenue while preserving the original amount of sales revenue. Rather than pay this cost up-front and tie up a significant chunk of capital, Show-Fleur makes this purchase on credit with a 90-day due date after invoicing.

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He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own.
In response, the firm should decrease its accounts receivable and revenue balances.
The accumulated depreciation amount shows how much depreciation expense has been charged against an asset.
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The two most common contra accounts on a balance are accumulated depreciation and the allowance for doubtful debts.
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To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts. Since it is a contra asset account, this allowance account must have a credit balance (which is contrary to the debit balances found in asset accounts). The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable. Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000. Contra revenue is a deduction from the gross revenue reported by a business, which results in net revenue.

What is the Effect of Contra Accounts to the Balance of Related (Paired) Account?

In the event that a contra account is not utilized, it can become increasingly troublesome to determine historical costs, which makes tax preparation time-consuming and difficult. The balance in the allowance for doubtful accounts is used to find out the dollar value of the current accounts receivable balance that is deemed uncollectible. There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue.

Contra equity accounts

A liability that is recorded as a debit balance is used to decrease the balance of a liability. It is not classified as a liability since it does not represent a future obligation. Including contra accounts on a balance sheet is important as it allows for a more transparent view of a company’s financial position. Or, if the contra liability account balance is immaterial, the accounting staff could elect not to keep a balance in the account at all. When the amount is material, the line item is typically presented separately on the balance sheet, below the liability account with which it is paired. The debit balances in the above accounts are amortized or allocated to an expense, such as Interest Expense over the life of the bonds or notes payable.

Instead, you need to record this value gap, and a contra asset account serves that purpose. If the customer pays within the 10 days and takes the sales discount of 50, then the business will only receive cash of 1,950 and accounts for the difference with the following sales discounts journal entry. Bills payable or notes payable is a liability that is created when a company borrows any specific contra expense account amount of money. This discount is subtracted from the total amount borrowed to better reflect the discount given by the lender. A company creates allowances for doubtful accounts to record the portion of accounts receivable which it believes it will no longer be able to collect. The amount in allowance for doubtful accounts is deducted from the accounts receivable account of a company.

List of Contra Accounts

Although you have not officially written off these debts yet, you show them to be a negative balance because you don’t believe the customer will pay you. The sales returns account contains either an allowance for returned goods, or the actual amount of revenue deduction attributable to returned goods. It is especially important to track sales returns separately and on a trend line, since this can provide important evidence of problems with a company’s products that are causing customers to return goods. For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance.

To determine the contra revenue, you simply deduct the gross sales from the net sales. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value. The discount is recorded in a contra revenue account which is offset against the revenue account in the income statement. Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement. Contra revenue accounts typically offset revenue accounts in a firm’s income statement.

For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance.
The purpose of a business offering sales discounts is to encourage the customer to settle their account earlier (10 days instead of 30 days in the above example).
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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.
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They are used in case some customers won’t be able to pay the money they owe to the business.
The total account receivable of $25,000 is discharged from the account receivable balance during the time the customer makes payment.
Another example is “2% 10/Net 30” terms, which means that a buyer will enjoy a 2% discount if he settles his balance within 10 days of the invoice date, or pays the full price in 30 days.
However, that $1.4 billion is used to reduce the balance of gross accounts receivable.
For its day-to-day operations, the business maintains a fleet of 75 identical 2016 Ford Explorer limousines, each initially retailing at $150 thousand.
Contra liability accounts are special accounts in the liabilities section of the balance sheet.

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. In other words, contra revenue is a deduction from gross revenue, which results in net revenue. The sales allowance shows the discounts given to customers when returning the product. This is done to entice customers to keep products instead of returning them.