Contra Accounts: Explained, Popular Types and Examples

Usually, companies add to the accumulated depreciation account after every accounting period. A contra-asset account is an account that opposes the balances of other asset accounts. As mentioned, a company will usually have debit balances in its asset accounts.

Liability Contra Account

Because contra asset accounts are used so frequently, it’s worth spending a little bit more time on them here, including common subtypes. They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting. 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. 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.

Types of Contra Account

One other type of account is the contra account and for accountants, this is a must-know. An important function of contra accounts is to preserve the historical value in the main account while presenting a reduction in the net value. By recording the offset in a separate contra account, accountants can see how much of the value in the main account has been offset. A contra account is an asset account that is kept at either a negative or zero balance and is used on a balance sheet to offset the positive balance of a paired asset.

How Are Contra Accounts Reported in Financial Statements?

Sometimes, we have an ancillary balance whose normal balance is the same as that of the parent account. For example, we need to keep the face value of a bonds payable and https://rnbxclusive.org/ebusiness-the-generic-term/ the premium amount in separate ledger accounts even though both have credit balances. A separate account used in such a situation is sometimes called a adjunct account.

Consider a business that offers an early payment discount to its customers, cutting their invoiced total by 3% if they pay within 1 week of invoicing. If every single buyer had taken advantage of the early payment discount, the company would have provided roughly $10 thousand in discounts during that same timeframe. In reality, the actual number of company discounts came closer to $5 thousand. This account serves two purposes — tracking total depreciation expenses while providing you with the accurate book value of the asset being depreciated.

• 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.
• Contra revenue accounts reduce revenue accounts and have a debit balance.
• A contra account is used to show the opposite effect or reduction of a related account.
• For example, if an account has a debit balance, a contra account will have a credit balance.
• A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger.

The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company. For example, if a company just reported equipment at its net amount, users would not be able to observe the purchase price, the amount of depreciation attributed to that equipment, and the remaining useful life. Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset. 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.

So rather than adjusting your Inventory account, you would update its contra account — Obsolete Inventory. A contra revenue represents any deductions or offsets that need to be removed from gross revenue to provide a clearer http://gipromez-mg.ru/eng/docs understanding of actual income  —  such as in the example just provided. These accounts will typically help track sales discounts, product returns, and allowances (e.g., a price reduction for a good with minor defects).

The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. The amount is reported on the balance sheet in the asset section immediately below accounts receivable. The amount in the accumulated depreciation account is deducted from the assets of a company, such as buildings, vehicles and equipment. This can help anyone viewing the financial information to find the historical cost of the asset. The accumulated depreciation amount shows how much depreciation expense has been charged against an asset.

In other words, the contra liability account is used to adjust the book value of an asset or liability. Accounts receivable is rarely reported on the balance sheet at its net amount. Instead, it is reported at its full amount with an allowance for bad debts listed below it. http://g-ost.ru/52191.html Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet.