Contra Accounts Examples & How They Work

The company uses Straight-Line Depreciation to track the loss of value of the asset over time. Since we are unsure of exactly which customer would default his payment, we can’t directly credit the accounts receivable account or the accounts receivable subsidiary ledger. For industries that rely on natural resources — mining, logging, oil, gas — depletion tracks the gradual exhaustion of the raw material in question, offsetting that loss in value against the initial appraisal of the land.

  • Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances.
  • For example, when your company borrows money, you would identify that debt in a Notes Payable account.
  • A Contra liability account is an account that is used to offset another liability account on the balance sheet.
  • Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting.
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Contra accounts are confusing at first, but, with a little study, understanding them becomes second nature. Let’s go over how they work and what the main types are, and then finish with an example. Contra accounts help provide more accurate financial information by separating certain items and highlighting their impact on the overall financial position.

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. Contra equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock.

Contra revenue

Any products that are sold at a discount or returns are deducted from gross revenue to produce net revenue as the top line on the income statement. 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. Offsetting the asset account with its respective contra asset account shows the net balance of that asset.

Consider an asset account, where the values are listed as debits, and the account itself will present a positive total. Conversely, for a contra asset account like depreciation, you would list all entries as a credit, carrying a negative https://personal-accounting.org/contra-account-definition/ total balance for the overall account. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. These contra revenue accounts tend to have a debit balance and are used to calculate net sales.

These accounts will typically help track sales discounts, product returns, and allowances (e.g., a price reduction for a good with minor defects). 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. 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.

Contra Account: Definition, Types & Examples

That is done by crediting accounts receivable by $100 and debiting the contra revenue account sales returns and allowances for $100. Hence, the company will have gross revenue or net sales equal to $9,900. However, some asset accounts need a negative counterpart to reduce the balance of that account. The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. Revenue is an income statement account, but it flows through to the equity section of retained earnings as well.

Types of Contra Accounts

We’ll need to dig into the footnotes to find out what the contra accounts are. Contra liabilities are common in companies that sell bonds to raise capital. To drum up interest in the bond, the company will sell it at a discount. For example, a bond with a principal amount of $1,000 may be sold for only $950. The bond is listed on the balance sheet at the full amount of $1,000, but the cash received is just $950, so a contra liability for the discount is listed to make the entry balance. Allowance for doubtful accounts (ADA) is a contra asset account used to create an allowance for customers who are not expected to pay the money owed for purchased goods or services.

How Are Contra Accounts Reported in Financial Statements?

The national brand gives the grocery store cash, reducing the overall cost of printing the flyer. For example, a company made sales of $60,000 but goods worth of $2,000 were returned due to damage. This helps the reader to know how many sales were actually made and how many customers had problems with the goods sold. Wanting to spruce up its aging inventory, Show-Fleur purchased new, climate controlled-seats for its fleet, delivering increased comfort for passengers and a cleaner, more modern look for vehicle interiors.

Each account in a general ledger will be designated debit or credit accounts depending on whether they’re categorized as assets, liabilities, revenues or expenses. Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost. Contra accounts act like regular accounts on the balance sheet but have a unique purpose. Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts.

However, that $1.4 billion is used to reduce the balance of gross accounts receivable. Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount. For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. A Contra liability account is an account that is used to offset another liability account on the balance sheet. Contra liability accounts are typically used for bonds, notes payable, and other indebtedness. An allowance for doubtful accounts is a contra asset account that is used to offset Accounts Receivable on the balance sheet.

Most accounts receivable would just be the time between purchase and credit card settlement. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account. The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold. It can help companies see the complete picture of their income and expenses and their equity or net worth. The allowance for doubtful accounts is used to reduce the net income by the estimated amount of uncollected receivables. This account helps to give a more accurate picture of the company’s financial position.