Contra Account Definition, Types, and Example

There are several examples of contra accounts, including accumulated depreciation, accumulated depletion, accumulated amortization, allowance for receivables, etc. These are all examples of contra asset accounts, which are the prevalent type of contra accounts. Contra assets are classified as assets on the balance sheet, but their negative balance and purpose of offsetting the asset value mean they act more like a liability. Examples of contra asset accounts include accumulated depreciation, obsolete inventory reserves, and allowance for doubtful accounts. There are three contra asset accounts that commonly appear in an organization’s chart of accounts. It is paired with the trade accounts receivable account, and contains a reserve for receivables that are unlikely to be paid by customers.

• The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold.
• 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.
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• It represents all the depreciation related to an asset or the company’s overall assets.
• This account helps all the stakeholders understand the financial numbers accurately.

Another example could be when a product is bought and is returned at face value because of a defect. The contra return on sales account will be debited while the normal cash account will be credited. 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 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.

Overview of Contra Asset Account

A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet. Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt. Contra accounts appear on the same financial statement as the related account.

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. However, if the billing office stopped there, you would overstate your assets and net income. You must also report the amount that you can reasonably expect will not be paid, if it is estimable and probable. You could simply adjust the parent account…but then you are missing an essential part of the story — how many patients were actually treated today for a sprain. 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.

Example #1: Revenue Contra Account

At first glance, contra accounts may seem complicated, but contra accounts exist to simplify financial statements. Contra asset accounts appear as a credit balance and reduce the value of assets. Contra liabilities appear as a debit balance and reduce the amount a company owes.

• The asset’s balance is reduced by the impairment amount to reflect the asset’s new economic value and the account remains on the balance sheet.
• 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.
• Another contra asset listed on the balance sheet is accumulated depreciation.
• Sales allowance reduces the selling price when a customer agrees to accept a defective unit instead of returning it to the seller.
• If you offer credit terms to your customers, you probably know that not all of them will pay.

Accounting contra asset accounts or contra revenue accounts follow a simple double-accounting procedure to eliminate errors in financial reporting. The most common way to account for contra accounts is to attach the regular account with its connected contra account underneath it on a company’s balance sheet. For example, the depreciation value will be listed underneath the value of a vehicle, or the allowance of bad debts will be attached to the accounts receivable.

Contra asset accounts

In general, accounts receivable are converted into cash within the operating cycle. This is treated as loss during the period, https://www.icsid.org/business/managing-cash-flow-in-construction-tips-from-accounting-professionals/ also called bad debt expense. This loss is treated as an ordinary business expense and is deducted from the asset’s balance.

The impact to the income statement includes the original sale, the contra account for returns, and the debit to expenses for estimated uncollectible based on net receivable. The balance sheet impact includes the remaining account receivable after returns and the estimated uncollectible. In either case, using these accounts can help you better manage depreciation expense, keep your accounts receivable balance accurate, and properly dispose of and account for obsolete inventory. 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. Contra asset accounts are used to track everything from depreciation expenses to returned merchandise.

How and Why Contra Accounts Are Used

A write-off journal entry removes an asset not in use and its related contra account from 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. They are useful in preserving the historical value in the main account while presenting a write-down or decrease in a separate contra account that nets to the current book value.

Therefore, for these three, the debit balance actually represents a negative amount. 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. Sales returns, sales allowance and sale discounts are different examples of contra revenue accounts. Contra accounts such as these have a debit balance and are deducted from the total amount of a company’s revenue.