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This contra account holds a reserve, similar to the allowance for doubtful accounts. For each debit against the inventory account, there will be a corresponding credit against the obsolete inventory contra account. 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.
Note that the contra liability account has a positive balance (a debit balance), and the liability account normally has a credit balance. Hence, the book value of the liability will be the credit balance of the liability account minus the debit balance of its contra liability counterpart. If you offer credit terms to your customers, you probably know that not all of them will pay. Creating this contra asset account builds in a safeguard against overstating your accounts receivable balance.
Contra liability accounts
The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. 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. 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.
A key example of contra liabilities include discount on notes or bonds payable. Contra liability accounts are not as popular as contra asset accounts. Transactions made to contra accounts are presented on a company’s financial statements under the related account.
Contra Revenue Account
This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000. A customer returned $100 worth of items, claiming them to be defective. Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets. In case the CA 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.
This allows the reader to see both the current and historical book values for a particular asset or liability. 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. The outstanding balance of a contra asset account represents a credit figure.
Contra AccountDefinition, Types, Uses, and How to Set them Up
The contra asset account, accumulated depreciation, is always a credit balance. This balance is used to offset the value of the asset being depreciated, so as of September 1, your $8,000 asset now has a book value of $7,866.67. The accumulated depreciation account is perhaps the most common contra asset account used by business owners. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. Contra equity reduces the total number of outstanding shares on the balance sheet.
- 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.
- The account Allowance for Doubtful Account is credited when the account Bad Debts Expense is debited under the allowance method.
- A contra account can be used to remedy an error, to track depreciation of an asset, or to register payments that are not collectible.
- The national brand gives the grocery store cash, reducing the overall cost of printing the flyer.
- Advisory services provided by Carbon Collective Investment LLC (“Carbon Collective”), an SEC-registered investment adviser.
When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense. 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. Sales returns, sales allowance and sale discounts are different examples of contra revenue accounts. Contra accounts such as these have a debit balance and are deducted from the total amount of a company’s revenue.
A contra account is an account whose balance is the opposite of a corresponding account. In finance, a contra account reduces the value of related or corresponding account. It offsets the balance of the related account, which means when the corresponding account is positive, a contra account will be negative.
Realized gains and unrealized gains are two concepts used to describe the financial performance of investments held by nonprofit organizations. Osman Ahmed is a member of WSO Editorial Board which helps ensure the accuracy of content across top articles on Wall Street Oasis. Osman started his career as an investment banking analyst at Thomas Weisel Partners… This content was originally created by member WallStreetOasis.com and has evolved with the help of our mentors.
These assets are expected to provide future economic benefits for many accounting periods. The amount spent on their purchase contra asset is capitalized and treated as assets. The cost is amortized every year until the asset is expected to be used.
- One common example is accumulated amortisation, which is a contra-asset account.
- In either case, the net amount of the pair of accounts is referred to as the book value of the asset account in question.
- Or, if they contain relatively minor balances, they may be aggregated with their paired accounts and presented as a single line item in the balance sheet.
- 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.
A contra account is a general ledger account with a balance that is the opposite of another, related account that it is paired with. For example, if an organization purchases equipment for $100,000 and expects to use it for 10 years on a uniform basis, then it would not expense the entire $100,000 in the year of purchase. An organization would rather record $100,000 as an asset and would amortize $10,000 depreciation each year for the next 10 years. Depreciation is not directly reduced from the asset so that the historic value/fair value of the
asset could be presented in a balance sheet.
A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger. Contra accounts are shown in the financial statements below the paired accounts, although sometimes the balances of the two accounts are merged to a net amount for presentation purposes. The annual amortization of the cost of an asset is referred to as depreciation expense. The corresponding effect is charged to accumulated depreciation accounts. Accumulated depreciation accounts accumulate the depreciation expense charged on the asset.
Examples of contra accounts include allowance for doubtful accounts, reserve for obsolete inventory, and accrued liabilities. Each of these accounts helps to offset another account on the balance sheet. For instance, the allowance for doubtful accounts reduces the net amount of accounts receivable, while the reserve for obsolete inventory does the same for inventory. Similarly, accrued liabilities reduce the total amount of current liabilities.
