(A debit balance in a contra asset account will violate the cost principle.) Learn more about contra asset accounts. 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, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount.
Sales Discounts
If the asset account had a credit balance or the contra asset account had a debit balance, this would indicate an error in the journal entries. The contra accounts will be grouped in the same category on the balance sheet or income statement as their related accounts. Generally speaking, the use of contra accounts is to ensure their related accounts stay clean and to keep track of historical cost easier. A contra expense account is a general ledger expense account that will intentionally have a credit balance (instead of the debit balance that is typical for an expense account).
List of Contra Accounts
This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete. Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods. In this scenario, a write-down is recorded to the reserve for obsolete inventory. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. In double entry bookkeeping terms, a contra expense account refers to an account which is offset against an expense account.
Purchase Return, Allowance, and Discount Contra Expense Accounts
- The company’s income statement will report the combination of the amounts in accounts 4210 and 4211 in order to show the company’s actual expense of $8,000 ($10,000 minus $2,000).
- Contra asset accounts can be used in a variety of areas, but there are three contra asset examples that you should pay close attention to.
- Wanting to spruce up its aging inventory, Show-Fleur purchased new, climate controlled-seats for its fleet, delivering increased comfort for passengers and a cleaner, more modern look for vehicle interiors.
- Master accounting topics that pose a particular challenge to finance professionals.
- The amount in the accumulated depreciation account is deducted from the assets of a company, such as buildings, vehicles and equipment.
- However, that $1.4 billion is used to reduce the balance of gross accounts receivable.
- The following are examples of contra expense accounts used in double entry bookkeeping.
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Revenue Recognition in Accounting: What is it? For Beginners
- Other examples include (1) the allowance for doubtful accounts, (2) discount on bonds payable, (3) sales returns and allowances, and (4) sales discounts.
- 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.
- There is almost always a story behind data; a clarification or historical insight that changes the meaning behind raw figures.
- At this point, it isn’t known which accounts will become uncollectible so the Accounts Receivable balance isn’t adjusted.
- Contra account is important as it not only allows a company to report the original amount of a transaction but also report any reductions that may have happened so that the net amount will also be reported.
- Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks.
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. 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. The most common contra account is the accumulated depreciation account, which offsets the fixed asset account. Taken together, the asset account and contra asset account reveal the net amount of fixed assets still remaining. A contra asset account is not classified as an asset, since it does not represent long-term value, nor is it classified as a liability, since it does not represent a future obligation.
For example, Accumulated Depreciation is a contra asset account, because its credit balance is contra to the debit balance for an asset account. This is an owner’s equity account and as such you would expect a credit balance. Other examples include (1) the allowance for doubtful accounts, (2) discount on bonds payable, (3) sales returns and allowances, and (4) sales discounts. For example net sales is gross sales minus the sales returns, the sales allowances, and the sales discounts.
Contra asset accounts can be used in a variety of areas, but there are three contra asset examples that you should pay close attention to. Asset accounts always maintain a debit balance, so anytime that you increase the value of an asset, such as when you deposit customer payments or invoice a customer, that asset account is debited or increased. Likewise, when you pay a bill, your cash account what is a contra account is reduced (credited) because you’re lowering the balance. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. 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.
AccountingTools
Including contra accounts on a balance sheet is important as it allows for a more transparent view of a company’s financial position. Obsolete, Unsold and Unusable Inventory are contra asset accounts with a credit balance that reduce the normal debit balance of the main Inventory asset account in order to present the net value of inventory on a company’s balance sheet. Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements. To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts. Since it is a contra asset account, this allowance account must have a credit balance (which is contrary to the debit balances found in asset accounts). The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable.
Difference Between Depreciation, Depletion, Amortization
