Contra Account Definition, Types, and Example

The account offsets the balance in the respective asset account that it is paired with on the balance sheet. Sometimes, the current value of a note receivable will fall compared to its face value. This process will give rise to a contra asset account which is the discount on notes receivables. Regardless of that, allowance for receivables accounts will exist for all companies that have account receivable balances. This account helps companies present a more accurate accounts receivable balance on the financial statements. Although contra-asset accounts have credit balances, they do not appear in liabilities or equity.

  1. The auditors aim to keep the balances at their adequate levels, but the controller might want to keep them as low as possible to reduce expenses and maximize profit levels.
  2. 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.
  3. Therefore, these companies must maintain an obsolete inventory reserve account to net off any unusable stock from the account.
  4. These accounts will typically help track sales discounts, product returns, and allowances (e.g., a price reduction for a good with minor defects).
  5. In the financial statements the asset a/c would be offset against the contra asset a/c to show the net balance.
  6. While assets have natural debit balances and increase with a debit, contra assets have natural credit balance and increase with a credit.

The net of the asset and its related contra asset account is referred to as the asset’s book value or carrying value. This general structure can be applied across all contra types, so if the parent account has a credit, the contra account will have a debit. Similarly, if the parent account lists entries as debits, the contra account will appear as a credit. As your business acquires new assets (e.g., machinery, office equipment, vehicles), you record the initial purchase value in your Fixed Asset account. But these items don’t retain that initial value; if liquidated, they would likely be sold at a loss. In order to record this ongoing value drop, you would use a corresponding contra account — an Asset Depreciation account.

How Do You Record the Allowance for Doubtful Accounts?

This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders. He’s currently a VP at KCK Group, the private equity arm of a middle eastern family office. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.

Contra equity

Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts. This helps the firms to evaluate the book value of their assets and liabilities. 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.

How to Record a Contra Account

This frequently happens to manufacturing companies that sell products with an expiration date since any inventory remaining in stock past the expiration date quickly becomes obsolete. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.

Because the allowance for doubtful accounts is established in the same accounting period as the original sale, an entity does not know for certain which exact receivables will be paid and which will default. Therefore, generally accepted accounting principles (GAAP) dictate that the allowance must be established in the same accounting period as the sale, but can be based on an anticipated or estimated figure. The allowance can accumulate across accounting periods and may be adjusted based on the balance in the account. By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes. For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately.

The Contra Revenue Account

This type of account is a contra asset that reduces the amount of the gross accounts receivable account. 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.

For example, if an account has a debit balance, a contra account will have a credit balance. Thus, netting off both will result in the final amount for the account. The company now has a better idea of which account receivables will be collected and which will be lost. For example, say the company now thinks that a total of $600,000 of receivables will be lost. The company must record an additional expense for this amount to also increase the allowance’s credit balance. Assume a company has 100 clients and believes there are 11 accounts that may go uncollected.

This account is paired with and offsets another asset account, so that a net balance is reported on the balance sheet. Contra liability accounts are less commonly used than contra asset accounts. Contra liability accounts are mainly used by corporations that issue bonds frequently. That is because some of the bonds are issued at a discount, so this reduces the balance of their bonds payable. By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company. Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset.

For example, if the balance of accumulated depreciation increases from $20,000 to $50,000, this means that the depreciation expense amounts to $30,000, which will be listed in the income statement. In the financial statements the asset a/c would be offset against the contra asset a/c to show the net balance. In bookkeeping terms, a contra asset account refers to an account which is offset against an asset account. Contra asset accounts also help companies keep their general ledgers organized. By recording reductions in a separate account, companies can get better insights into their actual accounts. Contra asset accounts help companies record any reductions to their non-current and current assets.

In essence, contra-asset accounts have a negative balance while other asset accounts have a positive balance. Both of these accounts offset each other contra asset account to represent a net balance on a company’s balance sheet. A contra-asset account is an account that opposes the balances of other asset accounts.

Properly documenting these contra accounts in your ledger can sometimes feel counter-intuitive since they operate in an opposite manner from their parent accounts. 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 total balance for the overall account. A contra asset account is an asset account with a natural credit balance.

As mentioned, companies do not represent these accounts on the balance sheet. However, they will still appear on the notes to the financial statements with necessary disclosures. On the other hand, accumulated depreciation is a contra-asset account. Contra accounts are a significant part of a company’s financial statements. These accounts can significantly reduce balances on the balance sheet.

Both the asset and the corresponding contra asset accounts must be stated clearly in the balance sheet. Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset’s net value or book value. Note that in accounting, the term “book value” is also used interchangeably with net value. 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.

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