Kristin is also the creator of Accounting In Focus, a website for students taking accounting courses. Since 2014, she has helped over one million students succeed in their accounting classes. The Accounts Payable balance is now zero and the Inventory balance is $4,850 Cash Flow Management for Small Businesses which matches what we actually paid for the inventory. Notice that we used Inventory, because under the perpetual method, whenever the value of inventory is changing, we must show that change in the account.
- The second transaction deals with the payment for the instruments already received.
- Using the contra expenses accounts, allows information about the original purchases to be maintained on the purchases account, and details of the purchase returns, purchases allowances and discounts received to be maintained on the respective contra expenses account.
- Allowance for Doubtful Accounts pairs with the Bad Debts Expense account when doing adjusting journal entries.
- The purpose of a contra expense account is to record a reduction in an expense without changing the balance in the main account.
- We will look at this transaction under both methods so you can see the difference.
What are Purchase Discounts, Returns and Allowances?
This is an owner’s equity account and as such you would expect a credit balance. Other examples include (1) the allowance for doubtful accounts, (2) discount on bonds payable, (3) sales returns and allowances, and (4) sales discounts. The contra accounts cause a reduction in the amounts reported. For example net sales is gross sales minus what are retained earnings the sales returns, the sales allowances, and the sales discounts. The net realizable value of the accounts receivable is the accounts receivable minus the allowance for doubtful accounts.
What are Contra Accounts?
Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries.
- Offering the discount to select customers can improve the relationship between the company and those customers.
- The discount is recorded in a contra expense account which is offset against the appropriate purchases or expense account in the income statement.
- Again, the only difference is that we do not track the changes in inventory under the periodic system.
- The difference between the two results in net sales revenue.
- When a business purchases goods on credit from a supplier the terms will stipulate the date on which the amount outstanding is to be paid.
- Kristin is a Certified Public Accountant with 15 years of experience working with small business owners in all aspects of business building.
Normal Balance and the Accounting Equation
In this instance the accounts payable balance is cleared by the cash payment and no purchase discount is recorded. The business pays cash of 1,470 and records a purchase discount of 30 to clear the customers accounts payable account of 1,500. This is the date that Whistling Flutes, LLC gets paid in full. However, because of the discount, the Company will not receive the full $5,000. Therefore, we must show the obligation fully paid even though the amount received is less than the amount the contra account purchases discount has a normal debit balance. in Accounts Receivable. We will use a contra account, Sales Discounts, to record the discount amount.
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. If the business pays within 10 days then a 2% purchase discount amounting to 30 can be deducted from the purchase invoice, and the business will pay only 1,470 to settle the supplier account.
Leave a comment