Contra Account Definition, Types, and Example
All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. For example, a company made sales of $60,000 but goods worth of $2,000 were returned due to damage.
Allowance for doubtful debt
- The term “contra” means “against,” which perfectly describes the role these accounts play in your finances – they are going against the norm.
- In spite of its name, contra liabilities function more similarly to assets.
- In reality, the actual number of company discounts came closer to $5 thousand.
- Allowance for doubtful accounts is netted from the accounts receivable balance.
- For example, we need separate accounts to hold the actual cost of property, plant and equipment (PPE) and related accumulated depreciation.
- This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms.
- A contra account is used to show the opposite effect or reduction of a related account.
A contra account is an account used in a general ledger to reduce the value of a related account when the two are netted together. The term “contra” means “against,” which perfectly describes the role these accounts play in your finances – they are going against the norm. This general structure can be applied across all contra types, so if the parent account has a credit, the contra account will have a debit. Similarly, if the parent account lists entries as debits, the contra account will appear as a credit.
How Does a Contra Account Work in Accounting?
For example, if the contra account is related to an asset then it would be referred to as contra asset and reported on the statement of financial position right below the related asset, reducing it to its net realizable value. You’ll continue to use the contra asset account until the equipment has been completely depreciated, retired, or sold. 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. At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset. 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.
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For example, GAAP accounting (or generally accepted accounting principles) requires fixed assets to be reported at cost on the balance sheet, but, over time, that value depreciates as the assets are used. The balance sheet will show a gross fixed assets value, a contra account value for accumulated depreciation, and a net value. All three values can be useful for investors depending on what they’re looking for. It carries a credit balance and is linked to the fixed asset account, which carries a debit balance. The accumulated depreciation account is designed to reduce the carrying value of the fixed asset account when depreciation is recorded at the end of each period.
- Unlike an asset which has a normal debit balance, a contra asset has a normal credit balance because it works opposite of the main account.
- Contra liability accounts are less commonly used than contra asset accounts.
- This will ensure the net value of accounts receivable at year-end is not overstated.
- In footnote 3, the company reports, “Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021.”
- The expense account uses its debit balance to reduce the revenue account’s credit balance.
- Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting.
Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement. Contra revenue accounts typically offset revenue accounts in a firm’s income statement. Contra equity accounts are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds. Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances.
A contra asset account is an account in the balance sheet that offsets the balance of a regular asset account. Therefore, to ensure accounts receivable stays clean and transparent, CCC will record $2,500 in the contra asset account called “Allowance for Doubtful Accounts”. This will ensure the net value of accounts receivable at contra expense account year-end is not overstated. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. In bookkeeping, a contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit (negative) balance.
Contra Asset
- In fact, as the name “contra” suggests, it is the opposite of aspecific class of account.
- By tracking contra accounts, a company can make more informed decisions about asset management, liability settlement, and overall financial planning.
- The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount.
- They are used in case some customers won’t be able to pay the money they owe to the business.
- For example, if the contra account is related to an asset then it would be referred to as contra asset and reported on the statement of financial position right below the related asset, reducing it to its net realizable value.
- Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount.
- Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance.
In case a customer returns a product, the company will record the financial activity under the sales return account. 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 balance in the allowance for doubtful accounts is used to find out the dollar value of the current accounts receivable balance that is deemed uncollectible.