Contra Account Explained

This type of account can equalize balances in the asset account that it is paired with on a business’s balance sheet. The contra asset account has credited balances that can reduce the balance in its paired asset account. A company can choose to state this information as separate line items on its balance sheet so that any financial planners or analysts can determine the extent to which a paired asset might be reduced. The contra liability account is less common than the contra asset account. An example of a contra liability account is the bond discount account, which offsets the bond payable account. A contra liability account is not classified as a liability, since it does not represent a future obligation.

When a company gives a discount to customers in an effort to convince them to buy its goods or services, it is recorded in the discount on sales account. Accounting is how we tell a story about an economic event or financial transaction, such as a purchase or a withdrawal of money, for example. Periodic financial statements report the impact of the story and are used by leaders of a firm or industry to analyze performance, plan, and respond. 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.

The Contra Equity Account

Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement. Examples of revenue contra accounts are Sales Discounts, Returns and Allowances. A contra account is a negative account that is netted from the balance of another account on the balance sheet.

For example, a bond with a principal amount of $1,000 may be sold for only $950. The bond is listed on the balance sheet at the full amount of $1,000, but the cash received is just $950, so a contra liability for the discount is listed to make the entry balance. Similarly, the company may choose to combine the amounts in both its contra and fixed asset accounts if the contra asset account has a relatively low balance. Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. 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. 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.

Types of Contra Asset Accounts and What They Mean

This account is not classified as an asset since it does not represent a long-term value. It is not classified as a liability since it does not constitute a future obligation. Power Manufacturers, Inc. purchases new machinery for a total of $300,000. The company projects that the equipment will be usable for six years, and it subtracts a 16% yearly depreciation rate from the initial value to calculate the amount of depreciation over the next six years.

• Contra revenue accounts show the deducting adjustments to gross revenue or producing net revenue.
• Contra EquityA contra equity account has a debit balance instead of a credit.
• Contra Accounts help show the net value of an account in the financial statements.
• Inventory is updated with the debit entry and the cost of goods sold is reduced with the credit.
• The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible.
• When this happens, the debit will be added to the expense account Bad Debt Expense and the credit will be added to the asset account, Allowance for Doubtful Accounts.
• To report the real value of the financial statement, you will need to record the amount you can reasonably estimate that will probably effect the financial statement classification.

Now, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. Contra accounts appear on the same financial statement as the related account. For example, an accounts receivable’s contra account is a contra asset account. This type of account can also be called the bad debt reserve or allowance for doubtful accounts. 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. 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.

What is Contra Account?

Contra LiabilityFinancing fees in M&A are an example of a contra liability, as the fees are amortized over the debt’s maturity – which in turn reduces the tax burden until the end of the term. A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account. Contra accounts provide more detail to accounting figures https://online-accounting.net/ and improve transparency in financial reporting. The information featured in this article is based on our best estimates of pricing, package details, contract stipulations, and service available at the time of writing. Pricing will vary based on various factors, including, but not limited to, the customer’s location, package chosen, added features and equipment, the purchaser’s credit score, etc. For the most accurate information, please ask your customer service representative.

The balance in the contra account is reduced when the corresponding asset or liability it is paired with is disposed of. Long-Term Assets are parent accounts that contain the original acquisition cost of fixed assets. Contra assets are credit accounts that carry their own values that when combined with the value of the paired account, informs the balance sheet. Simply looking at the accounting records of a given business, one can reach back to the history related to certain debits and credits. Contra revenue account, which is used to record the net amounts and usually has a debit balance, as opposed to the revenue account that records the gross amounts. A contra account is used in order to better portray the relationship between certain debits and credits within the overall financial structure of an entity. A contra account can be used to remedy an error, to track depreciation of an asset, or to register payments that are not collectible.

Значение contra account в английском

However, contra accounts allow them to track these transactions separately. Furthermore, these accounts are also crucial in allowing companies to record the original values for the paired contra account accounting accounts. 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.

The use of a contra account allows a company to report the original amount and also report a reduction so that the net amount will also be reported. The net amount is often referred to as the carrying amount or perhaps the net realizable amount. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. 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. A company creates allowances for doubtful accounts to record the portion of accounts receivable which it believes it will no longer be able to collect. The amount in allowance for doubtful accounts is deducted from the accounts receivable account of a company. The allowance method of accounting enables a company to determine the amount reasonable to be recorded in the contra account.

Types of contra accounts

Discount on bonds payable is a result of a bond issued for less than the face value of the bond. Companies must bring the balance of the discount on bonds payable account to zero over the life of the bond, which is accomplished through amortization. The amount recorded in the discount on bonds payable account is amortized to interest expense over the life of the bond.

The credit balance in this account is amortized or allocated to Interest Income or Interest Revenue over the life of a note receivable. A contra account relates to a specific area in the balance sheet that includes a negative balance. Companies record the opposite entries for that area in the related contra account.

Contra Asset Account

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Contra revenue accounts show the deducting adjustments to gross revenue or producing net revenue. Sales returned for a refund are posted to the contra account to reduce gross revenue or return on sales. The other side of the transaction is posted to cash because there is no value in retaining the sales transaction in the cash account. Another example of a contra asset account is the accumulated depreciation account which reduces the reporting value of capital assets. Allowance for obsolete inventory or obsolete inventory reserve are also examples of contra asset accounts. Sales returns is a contra revenue account as the figure is a negative amount net against total sales revenue.