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Types of Contra Accounts List of Examples Explanations Definition

The accumulated depreciation amount shows how much depreciation expense has been charged against an asset. Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value. For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets. A contra account is a balance sheet account that is used to offset a related asset, liability, or equity account. Contra accounts are used to ensure the proper valuation of these items is reflected on the balance sheet. These examples illustrate how contra accounts are used in various contexts to provide a more accurate picture of a company’s financial position and performance.

Contra revenue accounts show the reduced gross income because certain asset expenses give a business a net revenue outlook. Conta revenue account examples include sales returns, sales allowance, and discounts. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. The book value of an asset is the value of the asset recorded in the company’s balance sheet. Contra accounts are needed for determining the book value of assets held by a company.

The Contra Equity Account

In this way, an accumulated amortisation account offsets a related asset account (which is recorded as a debit). The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount. This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms. Most accounts receivable would just be the time between purchase and credit card settlement. 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).

A contra account is used to record adjustments and transactions that have an opposing impact to report the true value of a firm’s financial statements. Contra accounts are commonly found on general ledgers where all of a business’s accounts and transactions are organized on a master list. The contra account is used to report the correct assets while preserving the transactions and balance of the relating account.

How Are Contra Accounts Reported in Financial Statements?

cash flow problems are accounts used in financial accounting to offset the balance of a related account, effectively reducing the net balance of the paired accounts. Contra accounts are used to record adjustments, allowances, or discrepancies and to present the net value of the related account more accurately on the financial statements. The amount on the equity contra account is deducted from the value of the total number of outstanding shares listed on a company’s balance sheet. Contra Equity Account – A contra equity account has a debit balance and decreases a standard equity account. Treasure stock is a good example as it carries a debit balance and decreases the overall stockholders’ equity.

The use of contra accounts ensures the accuracy of financial accounting records, as the value of the original accounts is not directly reduced. In the event that a contra account is not utilized, it can become increasingly troublesome to determine historical costs, which makes tax preparation time-consuming and difficult. Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance. Revenue is an income statement account, but it flows through to the equity section of retained earnings as well. 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.

What Is the Benefit of Using a Contra Account?

To account for these returns and allowances, TechGadget records the amount in a contra revenue account called “Sales Returns and Allowances.” On the income statement, the net sales revenue will be reported as $77,000 ($80,000 – $3,000). Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Offsetting the asset account with its respective contra asset account shows the net balance of that asset.

The difference between an asset’s account balance and the contra account balance is known as the book value. 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. 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.

Do Contra Accounts Have Debit or Credit Balances?

Business owners should understand the functions of contra accounts and their importance to maintaining accurate financial records. By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company. For example, if a company just reported equipment at its net amount, users would not be able to observe the purchase price, the amount of depreciation attributed to that equipment, and the remaining useful life. 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.

On the balance sheet, the net accounts receivable will be reported as $49,000 ($50,000 – $1,000). 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. The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables. Home Depot reports net receivables and net property and equipment, implying that both are reduced by contra assets.

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. This depreciation is saved in a contra asset account called accumulated depreciation. The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment.

Categories: Bookkeeping