These contra revenue accounts tend to have a debit balance and are used to calculate net sales. Contra liability accounts such as discount on bonds payable and discount on notes payable usually carry debit balances. If there’s an increase to allowance for uncollectible accounts, you record the same amount in the bad debt expense of your income statement. Similarly, accumulated depreciation accounts reduce the value of the fixed assets you report on your financial statements. A contra account is a negative account that is netted from the balance of another account on the balance sheet. The two most common contra accounts are the allowance for doubtful accounts/bad debt reserve, which is subtracted from accounts receivable, and accumulated depreciation, which is subtracted from fixed assets.
Contra asset accounts journal entries
Contra liability accounts are typically used for bonds, notes payable, and other indebtedness. Below is the asset account debit balance and accumulated depreciation account credit balance on the balance sheet. As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are contra revenue account hard to find. 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. Contra liabilities are common in companies that sell bonds to raise capital.
Example of a Contra Account
When the balance in the accumulated depreciation is $10,000 and your equipment account has a debit balance of $50,000, then the book value of your equipment is $40,000. The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable. It also shows the carrying (net) amount of $19,000, which you report to your firm’s balance sheet. The contra equity account treasury stock is reported right on the balance sheet. Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period.
What is a Contra Expense Account?
Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. The amount in the accumulated depreciation account is deducted from the assets of a company, such as buildings, vehicles and equipment. This can help anyone viewing the financial information to find the historical cost of the asset.
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- To put it another way, a contra account is an account listed within a general ledger with the purpose of capturing the reduced value of a paired or related account when the two are added together.
- Therefore, for these three, the debit balance actually represents a negative amount.
- The sales discounts contra revenue account records the discounts given to customers on sales made to them, normally a cash or settlement discount.
- To compensate for those potential deadbeat customers, you can use a Bad Debts account to serve as a contra for your A/R.
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When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense. Including contra accounts on a balance sheet is important as it allows for a more transparent view of a company’s financial position.
The allowance for doubtful accounts is a contra asset account that is used to offset Accounts Receivable on the balance sheet. They are usually subcategory accounts linked to an account on the balance sheet. Contra accounts are used to offset each other and reduce the gross amount.
To compensate for those potential deadbeat customers, you can use a Bad Debts account to serve as a contra for your A/R. Now, if that sounded like a lot of mumbo-jumbo jargon to you, don’t worry. In this article, we’re going on a deep dive into what exactly a contra account is, how contra accounts work, why and how you would use contra accounts and more. The purpose of the Sales Returns account is to track the reduction in the value of the revenue while preserving the original amount of sales revenue. A contra account is a general ledger account with a balance that is the opposite of another, related account that it is paired with. ABC Computers makes sales of 90,000; unfortunately, due to a fault in a product, they received returns of 2,500.
Understanding Contra Liability Accounts
- Similarly, if the parent account lists entries as debits, the contra account will appear as a credit.
- For example, a building is acquired for $20,000, that $20,000 is recorded on the general ledger while the depreciation of the building is recorded separately.
- The contra asset account Accumulated Depreciation is deducted from the related Capital Assets to present the net balance on the parent account in a company’s balance sheet.
- The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment.
- If you debit the contra account, ensure that you offset the related account with a credit balance.
- If you’re the one managing your company’s books of accounts, be sure to report the contra account on your financial statement on the line item directly beneath the main account.
Contra accounts act like regular accounts on the balance sheet but have a unique purpose. If the balance in your allowance for doubtful accounts has a credit of $1,000 and your accounts receivable has $20,000 in normal debit balance, then the net value of the receivables is $19,000. Showing contra assets on your balance sheet allows potential investors to see how you write-down a depreciable asset, such as a piece of equipment.
