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. Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements. Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. Allowance for Doubtful Accounts, Accumulated Depreciation, and Valuation Allowance for Marketable Securities are contra asset accounts; while Discounts on Bonds Payable is an example of a contra liability account. Treasury stock and drawing accounts are examples of contra equity accounts. This depreciation is saved in a contra asset account called accumulated depreciation.
The company may take buyback decisions if it thinks the stock is undervalued in the open market or it decides to pay dividends to shareholders. 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. Most accountants choose to record the depreciation over the useful life of an item in the accumulated depreciation contra asset account, which is a credit account.
Overview of Contra Account
The company predicts which accounts receivable won’t be paid by customers and writes those off. When the account receivable is written off, it is added to bad debt expense on the income statement and placed in the contra account. If a company has a high or fast-growing allowance as a percentage of accounts receivable, keep a close eye on it. It could be growing with bad accounts, and cash flow will be affected. Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Therefore, a contra asset can be regarded as a negative asset account.
- Accumulated depreciation is the total of all depreciation that has been charged to existing fixed assets such as equipment and buildings.
- Business owners should understand the functions of contra accounts and their importance to maintaining accurate financial records.
- 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.
- Since it is a contra asset account, this allowance account must have a credit balance .
- If the related account is a liability account, then a contra liability account is used to offset it with a debit balance.
In footnote 3, the company reports, “Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021.” Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. Purchases Returns account which is maintained against Purchases account is contra-expense account. Accumulated Depreciation account for the respective asset account which is contra-asset account.
Types of Contra Accounts
Contra asset accounts are useful tools in double-entry accounting. They are also helpful for keeping the what is a contra account examples books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting.
Which accounts are contra accounts?
A contra account is a negative account that is netted from the balance of another account on the balance sheet. The two most common contra accounts are the allowance for doubtful accounts/bad debt reserve, which is subtracted from accounts receivable, and accumulated depreciation, which is subtracted from fixed assets.
Accounts in any business hold important information regarding different aspects of the entity and its operations. And to keep the information relevant and reliable these accounts needs to be updated to record all such transactions that relates to particular account. For example, funds deposited in the bank account and withdrawn are recorded in the Bank account. The account shows the total that is owed to or by that business at a particular time. Contra Accountmeans contra account as determined in accordance with GAAP.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is a contra asset because it reduces the value of the accounts receivable account on the general ledger. Often when a company extends goods on credit, management expects some of those customers not to pay and so anticipates writing off bad debt. While accumulated depreciation is the most common contra asset account, the following also may apply, depending on the company. Another reason to include contra accounts https://personal-accounting.org/ on a balance sheet is to preserve the historical value of the main account. This is done by separating the decreases that have occurred in the contra account from the original transaction amount. This allows the reader to see both the current and historical book values for a particular asset or liability. The amount in the accumulated depreciation account is deducted from the assets of a company, such as buildings, vehicles and equipment.
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- Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company.
- To offset this, the allowance for doubtful accounts balance is adjusted via a credit, while the bad debt account is debited to balance out the AR account.
- Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns.
- Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares.
- Contains the amount of sales discount given to customers, which is usually a discount given in exchange for early payments by customers.
For example, a company has determined that 5% of their accounts receivable in the amount of $15,000 will become uncollectible. Bills payable or notes payable is a liability that is created when a company borrows any specific amount of money. 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. A contra account is a general ledger account with a balance that is the opposite of another, related account that it is paired with. In other words, contra revenue is a deduction from gross revenue, which results in net revenue.
What are the different types of contra accounts?
A contra liability account is not classified as a liability, since it does not represent a future obligation. 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. There are different types of Contra Accounts and the most common are contra asset, contra liability, contra equity and contra revenue accounts.
In this scenario, a write-down is recorded to the reserve for obsolete inventory. Contra EquityA contra equity account has a debit balance instead of a credit. Contra LiabilityA contra liability is a liability account that carries a debit balance as opposed to a credit balance.
What Other Types of Contra Accounts Are Recorded on the Balance Sheet?
Contra Accounts help show the net value of an account in the financial statements. Debit depreciation expense for $16,875 and credit accumulated depreciation-equipment for $16,875. Debit accumulated depreciation -equipment for $16,875 and credit depreciation expense for $16,875.
- The difference between an asset’s account balance and the contra account balance is known as the book value.
- Revenue AccountRevenue accounts are those that report the business’s income and thus have credit balances.
- The balance sheet will show a gross fixed assets value, a contra account value for accumulated depreciation, and a net value.
- A second example of a contra asset account is Accumulated Depreciation.
- Debit BalanceIn a General Ledger, when the total credit entries are less than the total number of debit entries, it refers to a debit balance.
- 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.
It is a general ledger account to have its balance be the opposite of the original balance for that account. It is linked to specific accounts and is reported as reductions from these 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).