Contra accounts definition

The two most common contra accounts on a balance are accumulated depreciation and the allowance for doubtful debts. Accumulated depreciation tallies the depreciation to date of a fixed asset, such as a car or a building. A Contra liability account is an account that is used to offset another liability account on the balance sheet. Contra liability accounts are typically used for bonds, notes payable, and other indebtedness. Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable. They are used in case some customers won’t be able to pay the money they owe to the business.

In its general ledger, the business will want to capture its gross sales figures and the actual value of the discount. When recording assets, the difference between the asset’s account balance and the contra account balance is the book value of the asset. A doubtful debts contra account allows for future write-offs of accounts receivable. Although you have not officially written off these debts yet, you show them to be a negative balance because you don’t believe the customer will pay you. Overall, while maintaining contra accounts may require additional effort, the benefits they offer in terms of financial transparency and accountability make them an essential tool in accounting.

  • You may want to first classify contra accounts as contra asset accounts, contra liability accounts, contra equity accounts, or contra revenue accounts before accounting for any transaction.
  • For its day-to-day operations, the business maintains a fleet of 75 identical 2016 Ford Explorer limousines, each initially retailing at $150 thousand.
  • Each of these contra accounts serves to provide more detailed information about the transaction history of the related main account.
  • Allowance for Doubtful Accounts pairs with the Bad Debts Expense account when doing adjusting journal entries.
  • In a sales returns and allowances contra revenue account, you offset the balance in the sales revenue account.
  • As mentioned above, these accounts also pair with a paired account and reduce its carrying balance.

That is done by crediting accounts receivable by $100 and debiting the contra revenue account sales returns and allowances for $100. Hence, the company will have gross revenue or net sales equal to $9,900. Sometimes, both accounts can be written https://business-accounting.net/ in a single line if they don’t represent a large portion of the assets. In case the contra asset account is not listed in the balance sheet, it must be listed in the footnotes of the financial statement for the users to be informed.

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 https://quick-bookkeeping.net/ of fixed assets. Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount.

Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock. The auditors aim to keep the balances at their adequate levels, but the controller might want to keep them as low as possible to reduce expenses and maximize profit levels. Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values. Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at Scale Venture Partners, focused on technology. He’s currently a VP at KCK Group, the private equity arm of a middle eastern family office. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions.

Example #1: Revenue Contra Account

If the company repays the loan early, the lender may provide a discount. This discount is subtracted from the total amount borrowed to better reflect the discount given by the lender. The allowance method of accounting enables a company to determine the amount reasonable to be recorded in the contra account.

  • In the event that a contra account is not utilized, it can become increasingly troublesome to determine historical costs, which makes tax preparation time-consuming and difficult.
  • The amount is reported on the balance sheet in the asset section immediately below accounts receivable.
  • However, that $1.4 billion is used to reduce the balance of gross accounts receivable.
  • Including contra accounts on a balance sheet is important as it allows for a more transparent view of a company’s financial position.

The accumulated depreciation amount shows how much depreciation expense has been charged against an asset. Accumulated depreciation decreases the value https://kelleysbookkeeping.com/ of an asset, bringing it more in line with its market value. Put simply, contra accounts are used to reduce the normal accounts on the balance sheet.

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Conversely, for a contra asset account like depreciation, you would list all entries as a credit, carrying a negative total balance for the overall account. Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement. Examples of revenue contra accounts are Sales Discounts, Returns and Allowances. Contra accounts are more commonly paired with asset accounts, such as accounts receivable or inventory, to reduce the carrying values of those assets.

How to Present Contra Accounts on Financial Statements

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. 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.

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Simply hit Control + N under the Chart of Accounts or Edit, then click New (to create a new account). Examples include accumulated depreciation, sales returns and allowances, and contra equity accounts like treasury stock. Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement. Contra revenue accounts typically offset revenue accounts in a firm’s income statement. Contra equity accounts are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds.

Examples of a contra revenue accounts include sales returns, sales discounts, and sales allowances. You debit the contra revenue accounts and credit the corresponding revenue accounts. For example, when you debit the balance in sales returns account, make sure that you offset the sales revenue account with a credit balance.

These balances come from an underlying accounting or accumulation of accounts from the financial systems. However, some items may also reduce the total reported amount on these accounts. The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable.

What are Contra Liability Accounts?

Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement. The debit balances in the above accounts are amortized or allocated to an expense, such as Interest Expense over the life of the bonds or notes payable. Allowance for uncollectible accounts, or allowance for doubtful accounts, is one of the most common contra current asset accounts.