What is a Contra Asset Account? Definition, Types, Example, and More

You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy. A contra account is an account used in a general ledger to reduce the value of a related account. A Contra Account is where we record transactions that are opposing to a general ledger parent account, also called a relating account.

They find a nice set at Homes Inc. that includes a queen size bed, dresser, nightstand, and luggage rack. They want to take advantage of the interest free year of credit, so on December 5th they open a store account for the entire balance of $7,500 and make arrangements for delivery of the queen size bedroom set. Emilie is a Certified Accountant and Banker with Master’s in Business and 15 years of experience in finance and accounting from corporates, financial services firms – and fast growing start-ups. My Accounting Course is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. Beginner’s Guide to Financial Statements When researching companies, the financial statement is a great place to start.

The Contra Revenue Account

Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. In essence, contra asset accounts have a negative balance while other asset accounts have a positive balance. Both of these accounts offset each other to represent a net balance on a company’s balance sheet. Contra asset account examples include any transaction made on a contra account to balance out the debit account. Contra asset examples can be accumulated depreciation, discounts on notes receivable, trade accounts receivable, and obsolete inventory reserves.

• This depreciation is saved in a contra asset account called accumulated depreciation.
• 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.
• Any company that owns intangible assets such as software, patent, etc., will maintain an accumulated amortization account.
• A contra account is an account that records events like adjustments and transactions that are having an opposite effect on a relating account’s true value on the firm’s financial statements.

A second example of a contra asset account is Accumulated Depreciation. 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. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming.

Depreciation Expense Account Vs. Allowance for a Depreciation Account

A contra equity account reduces the total number of outstanding shares listed on a company’s balance sheet. When a company buys back its own shares from the open market, it records the transaction by debiting the treasury stock account. A company may decide to buy back its shares when management feels the stock is undervalued or because it desires to pay stock dividends to its shareholders.

• A company’s financial accounts will usually have three types of items.
• But for presentation purposes it is sometimes necessary to show net balance of two accounts.
• Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off.
• Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet.
• Contains the amount of sales discount given to customers, which is usually a discount given in exchange for early payments by customers.

For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets. Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. The contra account to the accounts receivable account is the allowance for doubtful accounts and is used to represent the amount of invoiced goods or services that the business does not expect to collect. The obsolete inventory reserve account is the contra account to inventory, another asset listed on the balance sheet. Products that become unusable are recorded in this contra account to show that they are still owned by the company, but they should be excluded from the market value of inventory. Sale on account, which can also be known as a sale on credit or credit sales, refers to when businesses give a product over to a customer and customers do not have to pay until later.

ACCOUNTABILITY

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 whats a contra account 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. The most common contra assets are accumulated depreciation and the allowance for doubtful accounts.

The contra account definition in business accounting is an account used in the general ledger for the purpose of reducing the amount in another account related to it. A general ledger is a comprehensive list of all accounts and their connected transactions in a business. A contra account balances the numbers from two or more accounts that are compared on the balance sheet.