Contra Account Definition, Types, and Example

The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. For example, a company has total fixed assets worth of $50,000 for the year ended 2019. If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts. For example, when depreciating an asset, the accumulated depreciation account is used to reduce the book value of the asset while also keeping track of the total amount of depreciation that has been posted to date. A delivery van is purchased by a business to use in delivering product and picking up materials.

• Consider an asset account, where the values are listed as debits, and the account itself will present a positive total.
• Fortunately, the seat vendor offered an early payment discount of 5%, meaning that when Show-Fleur paid off its full credit note within the first 30 days, it recouped $30 thousand in savings.
• Accumulated depreciation is the total of all depreciation that has been charged to existing fixed assets such as equipment and buildings.
• Or, if the contra liability account balance is immaterial, the accounting staff could elect not to keep a balance in the account at all.
• But these items don’t retain that initial value; if liquidated, they would likely be sold at a loss.
• On the other hand, if you’re looking at a high-flying growth stock that reports new revenue growth records each quarter but has a massive allowance for doubtful accounts, there may be problems ahead.
• 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.

What is a Contra Revenue Account?

A separate account is needed whenever the nature of transactions changes. It is because clubbing together dissimilar transactions impedes any analysis. For example, we need separate accounts to hold the actual cost of property, plant and equipment (PPE) and related accumulated depreciation. contra expense account If we record depreciation expense in the cost accounts directly, we will lose key information about the original cost of the assets and accumulated depreciation. To avoid this loss of important data, we record actual cost and depreciation in separate ledger accounts.

• This account serves two purposes — tracking total depreciation expenses while providing you with the accurate book value of the asset being depreciated.
• Note that in accounting, the term “book value” is also used interchangeably with net value.
• 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.
• We will define what contra accounts are, the types of contra accounts and provide examples to illustrate.
• Companies like to depreciate assets as quickly as possible to get the tax savings, so the balance sheet may not state the true value of fixed assets.
• Contra liability accounts are special accounts in the liabilities section of the balance sheet.

What is the Effect of Contra Accounts to the Balance of Related (Paired) Account?

• In an accounting system, ledger accounts are designed to contain only similar transactions and/or balances.
• The equity section of the balance sheet is where the shareholder’s claims to assets are reported.
• For example, a grocery store displays advertisements for a national brand in its weekly flyer.
• An example of a contra liability account is the bond discount account, which offsets the bond payable account.
• Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance.

Contra asset accounts provide business owners with the true value of certain asset accounts. For example, let’s say your accounts receivable balance is currently $11,500, but you’re not entirely sure that you’ll be able to collect the entire balance due. Of that amount, it is estimated that 1% of that amount will become bad debt at some point in the future. This means that the $85,000 balance is overstated compared to its real value. At this point, it isn’t known which accounts will become uncollectible so the Accounts Receivable balance isn’t adjusted. Instead, an adjusting journal entry is done to record the estimated amount of bad debt.

Types of Contra Accounts – Explanation

Accounting software can simplify the management of and reporting from your ledger. With the appropriate level of automation integration in your chosen tool, you can pull the relevant values into these individual accounts directly from invoices, credit agreements, and other documentation. Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Accumulated depreciation reflects the reduction in value of a fixed asset. 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.

Instead, it is reported at its full amount with an allowance for bad debts listed below it. Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off. As mentioned, contra asset accounts are usually listed below their matching asset accounts, and the net values of those assets are written next to the contra accounts. To oppose the revenue made by a company, contra revenue accounts must have a debit balance.

How Are Contra Accounts Reported in Financial Statements?

When considering all of the money currently owed to your business that’s recorded in your Accounts Receivable (A/R) line item as an existing asset, there’s a good chance that not all of those customers are going to pay you back in full. To compensate for those potential deadbeat customers, you can use a Bad Debts account to serve as a contra for your A/R. Now, if that sounded like a lot of mumbo-jumbo jargon to you, don’t worry.

Why should one include contra accounts on a balance sheet?

• The accumulated depreciation account is perhaps the most common contra asset account used by business owners.
• The company uses Straight-Line Depreciation to track the loss of value of the asset over time.
• So rather than adjusting your Inventory account, you would update its contra account — Obsolete Inventory.
• Namely, within a ledger, each account is intended to contain transactions and balances of a similar type only.
• Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost.