In accounting, contra accounts are a specific type of account used to offset or reduce the balance of another related account. They are paired with corresponding accounts to provide a clearer picture of financial transactions and to comply with the principles of double-entry https://perchontheweb.com/tag/retail/ bookkeeping. The revenue contra accounts Sales Returns, Discounts and Allowances are subtracted from the main Sales Revenue account to present the net balance on a company’s income statement. The contra equity account treasury stock is reported right on the balance sheet.

• The auditors want to ensure that reserves are adequate, while the controller is more inclined to keep reserves low in order to increase the reported profit level.
• Often when a company extends goods on credit, management expects some of those customers not to pay and so anticipates writing off bad debt.
• A debit will be made to the bad debt expense for $4,000 to balance the journal entry.
• Home Depot also devotes footnote 4 to its share repurchase program and reports that the company is authorized by its board to repurchase $20 billion in shares.
• If the bond is sold at a discount, the company will record the cash received from the bond sale as «cash», and will offset the discount in the contra liability account.

Definition of Contra Account

If you’re still using manual accounting systems, you’ll need to do a bit more work by recording your accumulated depreciation expense in your general ledger while also reporting it on your balance sheet as a contra asset account. A debit will be made to the bad debt expense for $4,000 to balance the journal entry. 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. Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance.

The Advantage of Using a Contra Asset Account

For a liability or revenue account that are naturally credit accounts, the contra accounts will be in a debit position. Companies that issue bonds are likely to use contra liability accounts. If the bond is sold at a discount, the company will record the cash received from the bond sale as «cash», and will offset the discount in the contra liability account. 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.

• Specifically, it is contra to shareholders’ equity because it decreases the total shareholders’ equity on the balance sheet.
• The equity section of the balance sheet is where the shareholder’s claims to assets are reported.
• Contra assets are accounts in the general ledger—where you enter your transactions—that carry a balance used to offset the account with which it is paired.
• By grasping the concept and application of contra, accounting professionals and learners alike can ensure accurate financial reporting and informed decision-making within organizations.

How are Contra Accounts Used and Reported?

When a company repurchases shares, it increases the fractional ownership of all remaining shareholders. In finance, a contra liability account is one that is debited for the explicit purpose of offsetting a credit to another liability account. In other words, the contra liability account is used to adjust the book value of an asset or liability. A second example of a contra asset account is Accumulated Depreciation. For instance, if a company has a plant asset such as Equipment with a debit balance of $92,000 and the account Accumulated Depreciation has a credit balance of $50,000, the carrying amount (or book value) of the equipment is $42,000.

Definition and Examples of Contra Assets

These accounts will typically help track sales discounts, product returns, and allowances (e.g., a price reduction for a good with minor defects). In its general ledger, the business will want to capture its gross sales figures and the actual https://rnbxclusive.org/ebusiness-the-generic-term/ value of the discount. Consider a company that owns equipment with an initial cost of $50,000. To reflect the reduction in the equipment’s value due to depreciation, the company also records $10,000 in the Accumulated Depreciation account.

Recording Transactions

Most accountants choose to record the depreciation over the useful life of an item in the accumulated depreciation contra asset account, which is a credit account. The balance sheet would show the piece of equipment at its historical cost, then subtract the accumulated depreciation to reflect the accurate value of the asset. 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.

Contra accounts are a significant part of a company’s financial statements. 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. While tracking contra asset accounts is cumbersome for bookkeepers and accounting clerks using manual accounting systems, if you’re using accounting software you’ll find that most of the heavy lifting is done for you. You may not need to use contra asset accounts right now, but as your business grows, using contra asset accounts will likely become a necessity. The accumulated depreciation account is perhaps the most common contra asset account used by business owners. However, that $1.4 billion is used to reduce the balance of gross accounts receivable.

Companies bury them in the footnotes and often don’t break out the actual calculation. Still, it is important when possible to consider how the net accounts are calculated and be wary of companies that are reporting a ton of bad debts. Revenue is an income statement account, but it flows https://www.warrantyvoid.us/page/41/ 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. Initially, the Sales account shows a credit balance when goods are sold.