Contra Asset Examples, How a Contra Asset Account Works

You can use contra accounts to record the goods your customers return, inventory that gets damaged, and equipment depreciation. When looking at the balance sheet, it is essential to understand what is being shown on the two sides – the assets debit balance and the liabilities credit balance. The assets are always shown on the left-hand side, and the liabilities are always displayed on the right-hand side.

Sales Allowances Account

The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. A contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability. The sales discounts contra revenue account records the discounts given to customers on sales made to them, normally a cash or settlement discount.

What is Contra in Accounting?

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. Contra accounts serve an invaluable function in financial contra revenue account reporting that enhances transparency in accounting books. Contra accounts allow you to show the amounts that offset a paired related account. As a small business owner, understanding how to set up contra accounts enables you to prepare and maintain accurate financial records. Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.

Contra account examples

Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement. The hottest retail item of today can be relegated to nostalgia channels on YouTube tomorrow. And when your business still has some of these outdated, unwanted, or unusable items in your inventory, you’ll want to offset the lost value of these assets in your general ledger and balance sheet. So rather than adjusting your Inventory account, you would update its contra account — Obsolete Inventory. There is almost always a story behind data; a clarification or historical insight that changes the meaning behind raw figures. In a report, layering on that additional context can be easy, but in a general ledger, you have few options for conveying nuance and subtlety.

• The following are examples of commonly-used contra asset accounts you could create to better understand your business financials.
• A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity).
• There are two major methods of determining what should be booked into a contra account.
• A contra account is a general ledger account with a balance that is the opposite of another, related account that it is paired with.
• This account helps to give a more accurate picture of the company’s financial position.
• Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

Contra accounts are worth a look

Note that the contra liability account has a positive balance (a debit balance), and the liability account normally has a credit balance. Hence, the book value of the liability will be the credit balance of the liability account minus the debit balance of its contra liability counterpart. For example, if your business has accounts receivable of $50,000 and an allowance for doubtful debts account totalling $5,000, the net accounts receivable is $45,000.

Contra equity

The sales will still show a sales credit on the profit and loss of 90,000, but there is also a contra returns account with a debit of 2,500. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. In other words, contra revenue is a deduction from gross revenue, which results in net revenue. A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment.

Contra Liability Account: What it is, How it Works, Example

You may want to first classify contra accounts as contra asset accounts, contra liability accounts, contra equity accounts, or contra revenue accounts before accounting for any transaction. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities includes discounts on notes or bonds payable. There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance.

Contra equity account

• Contra revenue accounts appear near the top of the income statement, as a deduction from gross revenue.
• But these items don’t retain that initial value; if liquidated, they would likely be sold at a loss.
• Contra accounts such as these have a debit balance and are deducted from the total amount of a company’s revenue.
• Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers.
• Instead, an adjusting journal entry is done to record the estimated amount of bad debt.
• Namely, within a ledger, each account is intended to contain transactions and balances of a similar type only.

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. The amount on the equity contra account is deducted from the value of the total number of outstanding shares listed on a company’s balance sheet.

Doubtful Debts and Contra Assets