Contra Account Definition + Journal Entry Examples

For example, after six years, the asset’s book value on the balance sheet will be $40,000. However, it will also have a negative accumulated depreciation of $60,000, offsetting that cost. A contra account is an account that companies use to reduce the value of a related account. It usually nets off against related accounts and provides an opposite effect to the balance. Therefore, contra accounts are the reverse accounts that decrease a specific account’s balance. Notes payable or bills payable represents a liability created when a company signs a written agreement to borrow a specific amount of money.

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. Allowance for uncollectible transaction 2021 accounts, or allowance for doubtful accounts, is one of the most common contra current asset accounts. The dollar balance in the allowance for uncollectible accounts is the amount you don’t expect to collect, and this offsets the amount you report in accounts receivable.

Understanding Contra Liability Accounts

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. 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.

• A contra account is a ledger account related to another specific

  ledger account.

• Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers.
• This account only relates to a company’s intangible assets rather than tangible.
• The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable.
• Are you looking for a way to account for accumulated depreciation, returned merchandise, or damaged inventory?

Contra revenue accounts reduce revenue accounts and have a debit balance. 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 include discount on notes or bonds payable. Contra liability accounts are not as popular as contra asset accounts.

Contra equity

The December 5th journal entries record the original sale, and the December 12th entries record the return and exchange. Inventory is updated with the debit entry and the cost of goods sold is reduced with the credit. Contra accounts help maintain the accuracy of financial records, provide transparency in reporting, and allow for proper tracking and analysis of specific transactions or events. Accumulated amortization is an account similar to accumulated depreciation. This account only relates to a company’s intangible assets rather than tangible. Discount on sales account represents the discount amount a company gives to customers as an incentive to purchase its products or services.

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 liabilities reduce liability accounts and carry a debit balance.

What are the types of Contra Asset Accounts?

Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers. The amount is not reported, and the net sales amount is reported on the income statement. Utilizing contra accounts in financial accounting has several significant advantages that enhance financial transparency and enable more effective financial management. The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet.

Every contra asset account on a company’s accounting records will also have a pairing account. For example, accumulated depreciation will go along with related assets. Similarly, allowance for receivables will pair with accounts receivable balances. These balances cannot offset asset accounts that do not relate to them. Overall, contra accounts are offsetting balances that are the opposite of specific accounts. There are several examples of contra accounts, including accumulated depreciation, accumulated depletion, accumulated amortization, allowance for receivables, etc.

Contra Asset Journal Entry Accounting

The balance sheet would show the piece of equipment at its historical cost, then subtract the accumulated depreciation to reflect the accurate value of the asset. Contra assets are accounts in the general ledger—where you enter your transactions—that carry a balance used to offset the account with which it is paired. Instead of debiting the asset account directly, the contra asset account balance will be credited (reduced) separately. You may use accounting software packages, such as QuickBooks Online to set up contra accounts. Simply hit Control + N under the Chart of Accounts or Edit, then click New (to create a new account). In finance, a contra liability account is one that is debited for the explicit purpose of offsetting a credit to another liability account.

• Conta revenue account examples include sales returns, sales allowance, and discounts.
• The basic function of this type of account is simply to be an opposite of another account.
• Overall, while maintaining contra accounts may require additional effort, the benefits they offer in terms of financial transparency and accountability make them an essential tool in accounting.
• They provide a more nuanced picture of a company’s finances, allowing stakeholders to make informed decisions based on realistic, transparent financial information.
• Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance.

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. The most common contra assets are accumulated depreciation and the allowance for doubtful accounts. For example, the debit will be to the expense account in an estimated uncollectible amount from a credit sale. The credit will be to the asset account or allowance for doubtful accounts.

There are two major methods of determining what should be booked into a contra account. For example, if an account has a debit balance, a contra account will have a credit balance. Thus, netting off both will result in the final amount for the account.