Skip to main content

Set Up a Revenue Contra Account

Contra accounts are reported on the same financial statement as the associated account and used for discounts and allowances.

Samuel avatar
Written by Samuel
Updated over 9 months ago

Overview

A contra account is an account in the general ledger that is used to offset or reduce the balance of another account. In accounting, contra accounts are used to show adjustments made to the original account.

For example, a company may have a "rent" account that represents the total amount of revenue earned from rent. However, the company may also have a "rent promotion" contra account that represents the amount of rent discounts given to customers. The balance in the "rent promotion" account is subtracted from the balance in the "rent" account to give a net sales figure.

Contra accounts keep financial accounting records clean and transparent by preserving the original historical value in a main account, while also capturing the related value reductions in a separate contra account. This helps in understanding net balances presented on a company’s financial statements.

Note: Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.

The Steps

Set Up a Contra Account on Your Chart of Accounts

The first thing you’re going to want to do is to create the Contra account in your Chart of Accounts. If you want a refresher on how to set this up, you can read the article Setting Up Your Chart of Accounts. Otherwise, continue below.

  1. To set up a contra account on your chart of accounts, click Accounting on the main menu and then click Chart of Accounts.

  2. Click on the + New Account button on the top right corner.

  3. On the New Account window, enter the following information:

    • Type - select Revenue > Income.

    • Account Name - you can enter something like "Rent Contra Account" or just "Contra Account."

    • Description - (Optional)

  4. The Active Account toggle is already on, and you’ll want to toggle on This is a sub-account. Since this will be a contra account for rent, we’ll select the Parent Account as Rent.

  5. On the left menu, click on Lease Options and toggle on Use this account for Lease Charges.

  6. Click Save to finish creating the account.

How to Use the Contra Account

We’ll use a rent charge as an example here of how a Contra Account would be used. Let’s take, for instance, that you have a new tenant, and you ran a promotion that offered $200 off their first month’s rent payment. If the rent was $2000 but because of the promotion, you don’t want to just post a charge of $1800. You want to show that the month’s income should have been $2000, but you offered a discount.

  1. For this example, we’re going to assume that a lease already exists. If you want to learn how to create a new lease, read the article, Add a New Lease. On the main menu, click Leasing and then click on Active Leases.

  2. Find the Lease you want to add a Contra Account to and click it.

  3. Go to the Transaction tab, and you should see a charge for the rent there. In this example, you’ll see a charge of $2000 for the Rent account, in which the tenant has a balance of $2000.

  4. Next, click the Issue Credit button and issue a credit to the Rent: Contra Account account in the amount of $200, which was the amount of the promotional discount.

  5. Once you do this, you’ll see that their balance is $1800 now.

That's it. Your tenant now just needs to make a payment.

How does this look on the Profit & Loss?

We can see what happens after doing this by heading over to the Profit and Loss report. You’ll see that while you had the potential to earn $2000 for the rent, but because you had a promotion for $200 off, -$200 shows up in the Contra Account to offset the difference. This shows your total income now as $1800.

As you can see, using the Contra account keeps your financial accounting records looking clean and transparent by preserving the original historical value in a main account while also capturing the related value reductions in a separate contra account. This helps in understanding net balances presented on a company’s financial statements.

Disclaimer

The information provided is not offered by a licensed accountant, should not be considered accounting, financial, or legal advice, and is provided (and intended) for general informational purposes only. Do not rely on the information provided; rather, please verify applicable accounting laws and regulations independently. This information should not be considered a substitute for professional advice and does not offer Generally Accepted Accounting Principles (GAAP). The author and publisher are not liable for any damages or losses resulting from reliance on this information.

Did this answer your question?