Purchase returns, allowances and discounts are all examples of contra expense accounts. The accounts normally have a credit balance and in use are offset against the purchases account which is normally a debit balance.
What is a contra purchase account?
A contra account is an account used in a general ledger to reduce the value of a related account. They are useful to preserve the historical value in a main account while presenting a decrease or write-down in a separate contra account that nets to the current book value.
Are purchases expense accounts?
Purchase is the cost of buying inventory during a period for the purpose of sale in the ordinary course of the business. It is therefore a kind of expense and is hence included in the income statement within the cost of goods sold.
What is a contra asset account example?
Examples of Contra Asset Accounts The most common contra asset account is Accumulated Depreciation. Accumulated Depreciation is associated with property, plant and equipment (plant assets). Accumulated Depreciation will be credited when Depreciation Expense is recorded.
What account is refund?
In accounting, refunds are handled through a contra-revenue account known as the sales returns and allowances account, reports Accounting Coach. When you issue a refund, you make a refund double entry, which means you must adjust two separate accounts in your records.
How does a purchase return and allowance work?
When the merchandise is returned, he needs to take the items out of goods available for sale and the inventory. He does this by crediting a contra account, purchases returns and allowances. This account is contra to purchases and will reduce the purchases account when he does the month end books. The journal entry for the return looks like:
Why does the contra account have a debit balance?
Purchases will normally have a debit balance since it represents additions to the inventory, an asset. The contra account purchases returns and allowances will have a credit balance to offset it. Bill uses the purchases returns and allowances account because he likes to keep tabs on the amount as a percentage of purchases.
Where does returns and allowances account go on the income statement?
On the income statement, the purchases returns and allowances account is subtracted from purchases.
Is there a contra account for cost of goods sold?
Notice there is no contra account for Cost of Goods Sold. We just reduce the amount in Cost of Goods Sold. Since we are tracking the returns through Sales Returns and Allowances, there is no need to create a contra account for Cost of Goods Sold.
