What Is a Contra Account? Types + Examples

Examples of contra assets include Accumulated Depreciation and Allowance for Doubtful Accounts. Unlike an asset which has a normal debit balance, a contra asset has a normal credit balance because it works opposite of the main account. https://www.facebook.com/BooksTimeInc/ Accounts receivable is rarely reported on the balance sheet at its net amount.

Taking a closer look at contra asset accounts

• They are crucial for compliance with generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS).
• In double entry bookkeeping terms, a contra expense account refers to an account which is offset against an expense account.
• A contra account is an asset account that is kept at either a negative or zero balance and is used on a balance sheet to offset the positive balance of a paired asset.
• Then in account 4211 they can see the portion of the cost that was paid by the employees.
• The mechanics of contra expense accounts involve debits and credits, similar to other accounts in double-entry bookkeeping.

Anytime you need to depreciate an asset, you’ll use an accumulated depreciation contra asset account, which records the amount of depreciation that has been expensed while offsetting the value of https://www.bookstime.com/ the asset being depreciated. As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find. Companies bury them in the footnotes and often don’t break out the actual calculation.

An example of recording a contra asset

It is not classified as a liability since it does not represent a future obligation. 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 contra expenses of sales generated by a business on its income statement. Examples of revenue contra accounts are Sales Discounts, Returns and Allowances. 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. This depreciation is saved in a contra asset account called accumulated depreciation. The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment.

Contra assets

The accumulated depreciation account is perhaps the most common contra asset account used by business owners. 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.

• The Allowance for Doubtful Accounts is used to track the estimated bad debts a company my incur without impacting the balance in its related account, Accounts Receivable.
• For industries that rely on natural resources — mining, logging, oil, gas — depletion tracks the gradual exhaustion of the raw material in question, offsetting that loss in value against the initial appraisal of the land.
• By employing these Contra Entries effectively, businesses can ensure that their financial records remain accurate, balanced, and reflective of the real-time movement of funds.
• An example of a contra liability account is the bond discount account, which offsets the bond payable account.
• 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.

Contra account accounting plays a crucial role in financial accounting by offsetting the balance of another account. It is used to track and report adjustments, reversals, or reductions in the value of assets or liabilities. Contra accounts provide a transparent and accurate representation of a company’s financial position, ensuring that financial statements reflect the true financial health of the business. Using the allowance for doubtful accounts, the contra asset account will more accurately reflect your true accounts receivable balance and make sure sure that your financial statements reflect the most accurate information possible.