What is a contra asset account?

Contra equity accounts carry a debit balance reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance. A contra account offsets the balance in another, related account with which it is paired. Contra accounts appear in the financial statements a contra account is an account that is linked with another directly below their paired accounts. Sometimes the balances in the two accounts are merged for presentation purposes, so that only a net amount is presented. If the related account is an asset account, then a contra asset account is used to offset it with a credit balance.

• Contra Liability a/c is not used as frequently as contra asset accounts.
• 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).
• These contras reduce the equity account and carry a debit balance.
• If the related account is a liability account, then a contra liability account is used to offset it with a debit balance.

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. 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). A contra account is an account whose balance is the opposite of its related (or partner) account. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting.

What Are the Different Types of Contra Accounts?

In other words, a contra asset account maintains a credit balance instead of a debit balance. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. Learn about the meaning of contra accounts, how and why they are used, and how to account for balances with them.

The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold. Contra accounts are a little tricky to think about when you are first starting out. Just remember that they carry an opposite balance than the other accounts in their account type. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock.

Contra Account

The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming. Another contra asset account is Allowance for Doubtful Accounts. This account appears next to the current asset Accounts Receivable. The account Allowance for Doubtful Account is credited when the account Bad Debts Expense is debited under the allowance method.

The most common contra account is the accumulated depreciation account, which offsets the fixed asset account. Taken together, the asset account and contra asset account reveal the net amount of fixed assets still remaining. A contra asset account is not classified as an asset, since it does not represent long-term value, nor is it classified as a liability, since it does not represent a future obligation.

Do Contra Accounts Have Debit or Credit Balances?

Contra revenue reduced gross revenue, resulting in net revenue. These contra revenue accounts tend to have a debit balance and are used to calculate net sales. These contras reduce the equity account and carry a debit balance. Contra equity reduces the total number of outstanding shares on the balance sheet.

Therefore, for these three, the debit balance actually represents a negative amount. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts reduce accounts receivable, while accumulated deprecation is used to reduce the value of a fixed asset.

It can be used for any type of account such as asset, liability, capital, revenue. Financial Statements are reports that summarizes the company’s financial income and position as of a given period. Balance sheet, income statement, statement of cash flows and statement of changes in equity are the types of financial statements.

In order to balance the journal entry, a debit will be made to the bad debt expense for $4,000. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns.

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). Their balances are, however, often disclosed in the footnotes. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major https://bookkeeping-reviews.com/ methods of determining what should be booked into a contra account. An example where accumulated depreciation account of plant and machinery is a contra a/c account linked to company’s plant and machinery. The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline.

• Contra accounts appear in the financial statements directly below their paired accounts.
• An account linked with another account that has an opposite normal balance and that is subtracted from the balance of the…
• An example where drawings account is a contra a/c linked to company’s capital account.
• Expense accounts are technically contra equity accounts because they are linked to another equity account, revenue, and maintain an opposite balance.

Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a credit
balance. An account linked with another account that has an opposite normal balance and that is subtracted from the balance of the… A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately. An example where drawings account is a contra a/c linked to company’s capital account.

What is a contra asset account?

If the related account is a liability account, then a contra liability account is used to offset it with a debit balance. Thus, the natural balance of a contra account is always the opposite of the account with which it is paired. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities include discount on notes or bonds payable. Contra liability accounts are not as popular as contra asset accounts.