The biggest problem students have with this topic is confusing purchase and sale transactions. I have had students do the problem perfectly, except they give me the journal entries for the purchase when I ask for the sale or vice versa. Spend extra time if needed to make sure that you understand what the transaction actually means.
Chapter 14 – Control Accounts
Do not jump right into the entries until you know what is happening in the transaction. Typically, a problem will state which company you should do the entries for. Go back through the transactions to see if the company is the buyer or seller. Read the transactions carefully or you may lose a lot of points on a problem you know how to do.
What is Accumulated Depreciation?
A contra expense account is an account used to reduce the amount of an expense without changing the balance in the main expense account. Examples of contra expense accounts include Purchase Returns, Purchase Discounts, and Advertising Reimbursements. 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.
Inventory: Discounts
The B/S impact is where the contra liability comes into play, i.e. the historical value of the debt is not impacted by the OID. In spite of its name, contra liabilities function more similarly to assets. Emilie is a Certified Accountant and Banker with Master’s in Business and 15 years of experience in finance and accounting from corporates, financial services firms – and fast growing start-ups. The discount on bonds payable amount shows the difference between the amount of cash received when issuing a bond and the value of the bond at maturity.
Difference Between Depreciation, Depletion, Amortization
- Returning to our example, let’s suppose our company sells $100,000 in revenue.
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- 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.
- Medici Music purchases instruments to sell in its stores from Whistling Flutes, LLC on August 13.
- Examples of Fixed Assets are Vehicles, Equipment, and Buildings.
On the sales side, the only difference is the fact that we would not track the change in inventory at the time of the sale. Let’s look at both entries together, since we already discussed the methodology. Again, the only difference is that we do not track the changes in inventory under the periodic system. By using a contra account, the company knows how much its sales were over the course of the year and how much was lost because of discounts and other items. This is good information for managers to have in order to make decisions about the effectiveness of company policy.
It does so by creating an allowance that estimates the merchandise returned. For example, if a business sold 200 units of its product at $800 each, that business has made $160,000. Notice bad debt expense does not change when the accounts receivable has been written off. The loss on the uncollectible receivable had already been anticipated when establishing the allowance. A common example of a purchase discount are the NET D payment terms, such as 2/10 Net 30, where a buyer receives a 2% discount if an invoice is paid early within 10 days, otherwise a full payment is due in 30 days.
Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. Discount on Bonds Payable is a contra liability account with a debit balance that reduces the normal credit balance of its parent Bonds Payable liability account in order to present the net value of payables on a company’s balance sheet. Discount on Notes Receivable is a contra asset account with a credit balance that reduces the normal debit balance of its parent Notes Receivable asset account in order to present the net value of receivables on a company’s balance sheet. Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement. The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet.
Contra accounts such as these have a debit balance and are deducted from the total amount of a company’s revenue. When a specific bad debt is identified, the allowance for doubtful accounts is debited (which the contra account purchases discount has a normal debit balance. reduces the reserve) and the accounts receivable account is credited (which reduces the receivable asset). The purchases discounts normal balance is a credit, a reduction in costs for the business.
Examples of Fixed Assets are Vehicles, Equipment, and Buildings. Each year of an asset’s life, another year of Depreciation Expense is recorded. The offset to the Depreciation Expense account is Accumulated Depreciation. An allowance is a balance sheet contra-account linked with another account that has an opposite value to that account, and is reported as a subtraction from the linked account’s balance. Returning to our example, let’s suppose our company sells $100,000 in revenue.
An income statement is a financial statement that reveals how much income your business is making and where it is going. The net sales figure on an income statement shows how much revenue remains from gross sales when sales discounts, returns and allowances are subtracted. Revenue accounts carry a natural credit balance; purchase discounts has a debit balance as a contra account. On the income statement, purchase discounts goes just below the sales revenue account. The credit balance in the liability account Bonds Payable minus the debit balances in the contra-liability accounts Discount on Bonds Payable and Bond Issue Costs results in the carrying value or book value of the bonds.
Net sales is equal to gross sales minus sales returns, allowances and discounts. Net sales are the sum of a company’s gross sales minus its returns, allowances and discount. And if the payments are not made in time, an anti-revenue account name purchase discounts lost is debited to record the loss. Next, let’s assume that the corporation focuses on the bad debts expense. As a result, its November income statement will be matching $2,400 of bad debts expense with the credit sales of $800,000. If the balance in Accounts Receivable is $800,000 as of November 30, the corporation will report Accounts Receivable (net) of $797,600.