Contra Account: A Complete Guide + Examples

contra account accounting

One common example is accumulated amortisation, which is a contra-asset account. This means that it acts in the opposite manner of a regular asset account.

contra account accounting

There can be hidden value in stocks that have a lot of fully depreciated buildings. Companies like to depreciate assets as quickly as possible to get the tax savings, so the balance sheet may not state the true value of fixed assets. Contra Equity Account – A contra equity account has a debit balance and decreases a standard equity account. Treasure stock is a good example as it carries a debit balance and decreases the overall stockholders’ equity.

How to Record Abandonment on Cash Flow Statements

A contra asset account is a type of asset account where the account balance may either be a negative or zero balance. This type of asset account is referred to as “contra” because normal asset accounts might include a debit, or positive, balance, and contra asset accounts can include a credit, or negative, balance. Because of the oppositional nature of these asset accounts, the contra account acts as a ‘contrary’ element to the debit balances of regular asset accounts. Furthermore, a contra asset account may also be regarded as a negative asset account because equalizing an asset account and contra asset account results in the asset’s net, or total, balance. Sales returns, sales allowance and sale discounts are different examples of contra revenue accounts. Contra accounts such as these have a debit balance and are deducted from the total amount of a company’s revenue.

  • Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life to account for declines in value over time.
  • Normal accounts on the general ledger will usually have a debit balance, while contra accounts are typically either zero or hold a negative credit balance.
  • Contra accounts appear on the same financial statement as the related account.
  • Contains either an allowance for reductions in the price of a product that has minor defects, or the actual amount of the allowance attributable to specific sales.
  • For example, an accounts receivable’s contra account is a contra asset account.

Accounting contra asset accounts or contra revenue accounts follow a simple double-accounting procedure to eliminate errors in financial reporting. The most common way to account for contra accounts is to attach the regular account with its connected contra account underneath it on a company’s balance sheet. For example, the depreciation value will be listed underneath the value of a vehicle, or the allowance of bad debts will be attached to the accounts receivable. Another example could be when a product is bought and is returned at face value because of a defect.

Definition Of a Contra Account?

Contra EquityA contra equity account has a debit balance instead of a credit. For example, accumulated depreciation is a contra-asset that reduces the value of a company’s fixed assets, resulting in net assets. An allowance for doubtful accounts is a contra-asset account that reduces the total receivables reported to reflect only the amounts expected to be paid. A bond discount is an example of a contra liability account and it reduces the amount of a bond payable. The balance in the allowance for doubtful accounts is used to find out the dollar value of the current accounts receivable balance that is deemed uncollectible.

Is contra revenue an expense?

The difference is that expenses represent money that flows out of a company as it does business, while contra revenues represent money that never comes in, or that comes in but turns around and goes right back where it came from.

As mentioned above, these accounts also pair with a paired account and reduce its carrying balance. The contra asset account carries a credit balance because an asset account usually has a debit balance.

What is a Contra Account?

Conta revenue account examples include sales returns, sales allowance, and discounts. This type is paired with the asset account, which allows a business to record the original price or value of the asset at time of purchase. The contra asset account then allows recording of the value factoring in depreciation. Allowance for doubtful accounts is a contra asset account used to create an allowance for customers that are not expected contra account accounting to pay the money owed for purchased goods or services. The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables. Contra Asset AccountA contra asset account is an asset account with a credit balance related to one of the assets with a debit balance. When we add the balances of these two assets, we will get the net book value or carrying value of the assets having a debit balance.

contra account accounting

We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R). Contains either an allowance for reductions in the price of a product that has minor defects, or the actual amount of the allowance attributable to specific sales. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy. Sales Discounts – Amount of discount given to customers who are usually able to pay earlier than the due date of an invoice.

Contra liabilities

This discount is subtracted from the total amount borrowed to better reflect the discount given by the lender. The percentage of sales method assumes that a fixed percentage of goods or services sold by a company cannot be received. When the original dollar amount is kept in the original account and a separate account is used for recording the deduction, the resulting financial information becomes more transparent and helpful for stakeholders. For example, a building is acquired for $20,000, that $20,000 is recorded on the general ledger while the depreciation of the building is recorded separately. The account shows the total that is owed to or by that business at a particular time.

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This depreciation is saved in a contra asset account called accumulated depreciation. The accumulated https://online-accounting.net/ depreciation account has a credit balance and is used to reduce the carrying value of the equipment.

Contra Asset Account

For each debit against the inventory account, there will be a corresponding credit against the obsolete inventory contra account. While accumulated depreciation is the most common contra asset account, the following also may apply, depending on the company. Revenue AccountRevenue accounts are those that report the business’s income and thus have credit balances.

  • The company projects that the equipment will be usable for six years, and it subtracts a 16% yearly depreciation rate from the initial value to calculate the amount of depreciation over the next six years.
  • $100,000 – $5,000 (the 5% allowance for doubtful accounts) to equal a net receivable amount of $95,000.
  • For both contra asset accounts, the entry is a debit to an expense and the credit is to the contra asset account.
  • Accumulated Depreciation contra account contains the cumulative sum total of all the depreciation expenses that have been charged against those fixed assets over time.
  • A contra expense account will behave in the opposite way a normal expense account will; instead of debiting to increase, a contra account must credit to increase.
  • Home Depot also devotes footnote 4 to its share repurchase program and reports that the company is authorized by its board to repurchase $20 billion in shares.

Contra accounts will be linked to the main debit account and shown together on a balance sheet. For example, a business ledger might show a $10 sale of a product, but the product was returned under warranty protection because of a failed feature. Allowance for doubtful accounts is a common contra asset listed on a company’s balance sheet under accounts receivable. When a company sells its products or services to customers on credit, the company records the amount sold in its accounts receivable account. Typically, a company fails to collect all of the money owed by customers making purchases on credit. The amount a company records as allowance for doubtful accounts is the amount from its accounts receivable the company considers uncollectible. A contra account is used for account classification and is also reported in a company’s financial statement alongside its corresponding or related account.

When reporting a contra account in a company’s financial statement, it is reported immediately below the account it relates to or corresponds. Contra accounts have different names depending on the account they correspond. For instance, a contra account that relates to an accounts receivable is called a contra asset account. Revenue is an income statement account, but it flows through to the equity section of retained earnings as well. Any products that are sold at a discount or returns are deducted from gross revenue to produce net revenue as the top line on the income statement. Allowance for doubtful accounts is netted from the accounts receivable balance. The company predicts which accounts receivable won’t be paid by customers and writes those off.

For instance, it is common to keep the purchase price of a piece of equipment as a historical cost in the debit asset account when it comes to fixed assets. Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset. Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets.

The Contra Asset Account

Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value. For example, GAAP accounting requires fixed assets to be reported at cost on the balance sheet, but, over time, that value depreciates as the assets are used. The balance sheet will show a gross fixed assets value, a contra account value for accumulated depreciation, and a net value. All three values can be useful for investors depending on what they’re looking for. The first time a contra asset account is recorded in a journal entry, it is to be deducted from the expense. For example, when the credit amount in allowance for doubtful accounts increases, it is also recorded in the bad debt expense as a debit increase. A contra account is used to offset the debit of a regular asset account.

A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity). A contra liability account is a liability account that is debited in order to offset a credit to another liability account. The amount is reported on the balance sheet in the asset section immediately below accounts receivable. Key examples of contra accounts include accumulated deprecation and allowance for doubtful accounts. Note that the Balance Sheet is not affected with the result of the above entry as the cash flow is between two asset accounts. A contra entry is recorded when the debit and credit affect the same parent account and resulting in a net zero effect to the account. These are transactions that are recorded between cash and bank accounts.

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