A contra account is a general ledger account with a balance that is opposite of the normal balance for that account classification. The use of a contra account allows a company to report the original amount and also report a reduction so that the net amount will also be reported. The net amount is often referred to as the carrying amount or perhaps the net realizable amount.
- By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount.
- The most common contra type, contra assets, records the loss in value of any asset accounts listed in your general ledger.
- Therefore, for these three, the debit balance actually represents a negative amount.
- That is to completely or partially offset the balance of their related asset accounts.
- Providing sales allowance represents discounts given to customers to entice them to keep products instead of returning them.
Contra liabilities
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 Account Definition, Types, and Example
As mentioned, there can be a contra account for any type of transaction depending on a company’s needs. Other than the above contra-asset accounts, we often see contra-revenue accounts for any sales returns or sales rebates. To oppose the revenue made by a company, contra revenue accounts must have a debit balance. Allowance for doubtful accounts is netted from the accounts receivable balance.
Main Elements of Financial Statements: Assets, Liabilities, Equity, Revenues, Expenses
- Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation.
- To put it another way, a contra account is an account listed within a general ledger with the purpose of capturing the reduced value of a paired or related account when the two are added together.
- One such method is the use of contra accounts, a type of account that directly correlates and offsets a related account.
- Contra liabilities are common in companies that sell bonds to raise capital.
- Since a contra liability account does not indicate a future obligation, it is not categorized as a liability.
- Nor would it count as a liability as it does not reflect a future obligation.
Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. A contra account is an account with a balance opposite the normal accounts in its category. Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts. In other words, contra accounts are used to reduce normal accounts on the balance sheet. A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity). Netbook value or carrying amount of an asset is its historical cost less accumulated depreciation.
Equity Contra Account
- Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance.
- The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment.
- In reality, the actual number of company discounts came closer to $5 thousand.
- Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance.
- Notes payable or bills payable represents a liability created when a company signs a written agreement to borrow a specific amount of money.
- Offsetting the asset account with its respective contra asset account shows the net balance of that asset.
The initial cost of this upgrade was $8 thousand per limo or $600,000 in total. Contra accounts help provide more accurate financial information by separating certain items and highlighting their impact on the overall financial position. A contra account is used to show the opposite effect or reduction of a related account.
Accumulated Depreciation 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. The contra equity account treasury stock is reported right on the balance sheet. Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period.
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In this article, we’re going on a deep dive into what exactly a contra account is, how contra accounts work, why and how you would use contra accounts and more. The treasury stock account, which is a deduction from equity since it represents the sum paid by a firm to purchase back its stock, is an example of a counter account within equity. Contra accounts help maintain the accuracy of financial records, provide transparency in reporting, and allow for proper tracking and analysis of specific transactions or events.
Contra equity accounts
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. 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. To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts. Since it is a contra asset account, this allowance account must have a credit balance (which is contrary to the debit balances found in asset accounts).
Contra account examples
As evident from the table below, each contra account has a parent account whose normal balance is often exactly opposite of the normal balance of the relevant contra account. Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.
