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Contra Account Definition, Types, and Example

Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets. In case the CA 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. A contra expense account is an account used to reduce the amount of an expense without changing the balance in the main expense account. Examples of contra expense accounts include Purchase Returns, Purchase Discounts, and Advertising Reimbursements. Of that amount, it is estimated that 1% of that amount will become bad debt at some point in the future.

• Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value.
• Contra accounts appear on the same financial statement as the related account.
• These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances.
• Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset.
• Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount.
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A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet. Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt. The contra account definition in business accounting is an account used in the general ledger for the purpose of reducing the amount in another account related to it. A general ledger is a comprehensive list of all accounts and their connected transactions in a business.

Contra Liability Account

An example of a contra asset account is “Accumulated Depreciation.” It is used to record the cumulative amount of depreciation expense charged against a depreciable asset over its useful life. As an asset account, the “Accumulated Depreciation” account has a credit balance, while the related asset account (e.g., “Equipment” or “Buildings”) has a debit balance. Contra assets are accounts in the general ledger—where you enter your transactions—that carry a balance used to offset the account with which it is paired. Instead of debiting the asset account directly, the contra asset account balance will be credited (reduced) separately. In the realm of accounting, various techniques are used to ensure financial statements provide an accurate and comprehensive view of a company’s financial health.

• The most common contra assets are accumulated depreciation and the allowance for doubtful accounts.
• They are useful in preserving the historical value in the main account while presenting a write-down or decrease in a separate contra account that nets to the current book value.
• Let’s consider a fictional example of a small business called “GreenThumb Nursery” to illustrate the use of contra asset accounts in financial accounting.
• As mentioned above, the primary situation in which contra asset accounts appear has to do with accumulated depreciation.
• They are used in case some customers won’t be able to pay the money they owe to the business.
• The size of the reserve also reveals the amount of bad debt that the company expects to experience from the current set of receivables.

Hence, the company will have gross revenue or net sales equal to $9,900. 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. Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances.

Contra Asset Accounting & Examples

In either case, using these accounts can help you better manage depreciation expense, keep your accounts receivable balance accurate, and properly dispose of and account for obsolete inventory. 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 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. 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. It can be used for any type of account such as asset, liability, capital, revenue.

Note that in accounting, the term “book value” is also used interchangeably with net value. Therefore, the book value of an asset in the books is equal to its historical cost (the debit balance of the asset) minus the related amount of contra asset in the balance sheet (the credit balance of the contra asset). Let’s consider a fictional example of a small business called “GreenThumb Nursery” to illustrate the use of contra asset accounts in financial accounting. 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.

CHART OF ACCOUNTS

Contra account is important as it not only allows a company to report the original amount of a transaction but also report any reductions that may have happened so that the net amount will also be reported. They are useful in preserving the historical value in the main account while presenting a write-down or decrease in a separate contra account that nets to the current book value. Contra accounts serve an invaluable function in financial reporting that enhances transparency in accounting books. The use of contra accounts ensures the accuracy of financial accounting records, as the value of the original accounts is not directly reduced. 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.

However, the fundamental principle is that the contra account is used to offset the related main account, providing a more nuanced view of the company’s financial position. 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. Contra accounts are an essential component of the accounting process, designed to reflect the true value of assets, liabilities, equity, or revenue of a business. They provide a more nuanced picture of a company’s finances, allowing stakeholders to make informed decisions based on realistic, transparent financial information.

However, if the billing office stopped there, you would overstate your assets and net income. You must also report the amount that you can reasonably expect will not be paid, if it is estimable contra asset and probable. You could simply adjust the parent account…but then you are missing an essential part of the story — how many patients were actually treated today for a sprain.

The discount on bonds payable amount shows the difference between the amount of cash received when issuing a bond and the value of the bond at maturity. A contra account is a general ledger account with a balance that is the opposite of another, related account that it is paired with. Whether reported as separate lines on the financial report or as a cumulative value, the net amount of the pair of accounts is called the “net book value” of the individual asset. The Johnson family is expecting visitors for the holidays and will need to furnish the spare bedroom. They find a nice set at Homes Inc. that includes a queen size bed, dresser, nightstand, and luggage rack.

Understanding a Contra Account

Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. The sales allowance shows the discounts given to customers when returning the product. This is done to entice customers to keep products instead of returning them.

At the end of the year, their assets are as follows… Nova Company valued a van at $30,000, an office building at $500,000 and office equipment at $20,000. At the same time, depreciation for the van at the end of the year ended up at $500. Taking into account the list of contra asset accounts, how would you calculate the net value of assets? If the example looks difficult, rest assured the solution is very simple. Because contra assets simply detract from the total value of the asset account, all one has to do is add up all the assets together first.

For example, a grocery store displays advertisements for a national brand in its weekly flyer. The national brand gives the grocery store cash, reducing the overall cost of printing the flyer. You can estimate the total to record in the allowance for doubtful accounts based on uncollectible revenue totals from the previous year or you can conservatively estimate the amount.

For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance. Consider what would happen if you have sales on credit that you reasonably expect will not be paid. In the example of Homes Inc. the percentage of customers defaulting on the account, and the amount defaulted, is estimable and probable. Past experience with uncollected bad debt has been, on average, 10% of credit sales.