Contra Asset vs Contra Revenue…. If you are wondering what is the difference between a contra asset account and a contra revenue account? All your queries are going to be gone away. Just read ahead!
Contra means the opposite. A contra account is an account that has an opposite balance to the associated account. In other words, as we know that the natural balance of assets is debit. Subsequently, a contra asset will have a credit balance. And the same rule is applied to the contra revenue account. The natural balance of the revenue account is credit. Therefore, the contra revenue account will have a debit balance.
What is Contra Asset Account?
So, let’s first discuss the contra asset account. Any account that reduces the balance of an asset account is said to be a contra asset account. On the other hand, an account reducing the balance of the revenue account is considered a contra revenue account.
A simple yet thought-provoking question arises here, how an account can cause another account to lose its value. Have a look at this example. Let’s suppose you bought machinery worth $2,00,000 and you depreciate it by $20,000. Gradually the asset is losing its value. Hence the depreciation account is associated with the asset account. Also, it is visible that the depreciation account is causing a fall in the value of the asset account. Therefore, we call accumulated depreciation a contra asset account.
Contra Asset Account Example
Machinery $2,00,000 Actual Cost
Depreciation Expense ($20,000) Contra Asset Account Value
$1,80,000 Net Value
What is Contra Revenue Account?
Unlike the asset account, the natural balance of the revenue account is credit. Whenever your revenue increases it is credit. Similarly, when revenue decreases it is debited.
The question is how and why does revenue decrease? Ok, let’s assume you own a typewriter company. A month before you sold 20 typewriters to a customer worth $2, 00,000. Unfortunately, two of the typewriters were defective. The customer returns you back those two typewriters worth $20,000. So, now you need to do a journal entry of sales returns in which you will reduce your sales.
Contra Revenue Account Example
Sales or revenue $2,00,000 Gross Value
Sales return ($20,000) Contra Revenue Account Value
$1,80,000 Net Value
Because of the returning of goods from customers sales revenue is decreased. In simple words, the sales return account is causing a reduction in the revenue account. Thus, it will be called a contra revenue account.
Difference Between Contra Asset and Contra Revenue
Let’s have a clear cut difference between contra asset and contra revenue
So, the chart above clearly displays the difference between contra assets and contra revenue.
Comparing Contra Asset Vs Contra Revenue Through Example
Let’s have a deeper understanding of the contra asset vs contra revenue with the help of examples. One of the most known examples of contra asset is depreciation. What does an accumulated depreciation account do? It reduces the balance of the asset account. First of all, we know that when an asset increases it is debited, and when decreases it is credited. So, the accumulated depreciation account which is a contra asset account has a negative balance and it reduces the balance of the asset account.
For instance, you buy a car worth $8,00,000 and you will depreciate it by $8,000 per year for the normal wear and tear of the car. In this case, you will debit your asset by $8,00,000 and you will reduce the balance of the asset account by $8,000. Hence in this case depreciation account is reducing the balance of the asset account. Therefore, a depreciation account is known as a contra asset account.
Contrarily, a revenue account is an account that records what we earn. Above all, the contra revenue account is the one that goes in reverse. The natural balance of the revenue account is credit. So, the natural balance of the contra revenue account will be what? Not difficult to guess just go in reverse, and that is debit. To sum up, the increase in revenue is credit, and the decrease in revenue is debit.
One of the basic and most important differences between both is the natural balance of asset account and revenue account. The natural balance of the asset account is debit. While the natural balance of the revenue account is credit. Similarly, the contra asset account’s normal balance is credit, and the contra revenue account’s normal balance is debit.
Comparing Through Journal Entries
These journal entries below help us clearly distinguish between contra asset and revenue account.
Increase in asset
Decrease in the asset (contra asset)
In this example, the asset account is reduced by $20,000. The depreciation account is causing a reduction in its value. Hence depreciation is called contra asset account.
Increase in revenue
The increase in the revenue is credit while the decrease is recorded as debit.
Decrease in revenue
In this example, the revenue account is reduced by $10,000. The sales return account is leading to a reduction in the sales account. Therefore, the sales return account is known as a contra revenue account because it decreases the value of assets.
Above mentioned journal entry shows a stark difference between contra asset and contra revenue account. Both of them work differently. One reduces the balance of the asset account. While the other is reducing the balance of the revenue account. In addition, the prior one has a credit balance (contra asset) while the latter one (contra revenue) has a debit balance. After having elaborated examples of contra asset and contra revenue account it has become easier to understand the difference.
Similarities- Contra Asset vs Contra Revenue Account
Apart from these differences, there are some similarities between both accounts.
- Both of these accounts are dependent upon other accounts.
- Cause reduction to the parent account.
- Always goes in reverse.
- Both of these accounts cannot stand alone.
- Contra accounts always possess the opposite balance from their associated account.
- The contra asset account and contra revenue account are different in the way that one causes the reduction of the asset account while the other is causing a reduction to the revenue account.
- They both always go in reverse.
- Contra Asset Account has a debit balance while the contra revenue account has a credit balance.