The difference between an asset’s balance and the contra account asset balance is the book value. Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount.
- Gross accounts receivable is the total assets included on a company’s balance sheet.
- Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable.
- Purchase returns, allowances and discounts are all examples of contra expense accounts.
- Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.
How Are Contra Accounts Reported in Financial Statements?
Contra accounts are confusing at first, but, with a little study, understanding them becomes second nature. Let’s go over how they work and what the main types are, and then finish with an example. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University. Master accounting topics that pose a particular challenge to finance professionals.
- Nor would it count as a liability as it does not reflect a future obligation.
- Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a creditbalance.
- But these items don’t retain that initial value; if liquidated, they would likely be sold at a loss.
- 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.
- Companies record accounts receivable as assets on their balance sheets since there is a legal obligation for the customer to pay the debt.
Accounting made for beginners
The contra accounts will be grouped in the same category on the balance sheet or income statement as their related accounts. Generally speaking, the use of contra accounts is to ensure their related accounts stay clean and to keep track of historical cost easier. When evaluating accounts receivable, give proper weight to the difference between gross and net accounts receivable, as well. Gross accounts receivable is the total assets included on a company’s balance sheet.
- Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean.
- This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms.
- Offsetting the asset account with its respective contra asset account shows the net balance of that asset.
- That is done by crediting accounts receivable by $100 and debiting the contra revenue account sales returns and allowances for $100.
- Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost.
What is a contra asset account?
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. The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable. Contra liability accounts are less commonly used than contra asset accounts. Contra liability accounts are mainly used by corporations that issue bonds frequently. That is because some of the bonds are issued at a discount, so this reduces the balance of their bonds payable. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean.
Managers and investors must understand contra accounts to accurately analyze a company’s balance sheet and determine the organization’s financial position. Contra asset accounts include allowance for doubtful accounts and the accumulated depreciation. Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements. what is a contra expense Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company. For example, if a company just reported equipment at its net amount, users would not be able to observe the purchase price, the amount of depreciation attributed to that equipment, and the remaining useful life.
In other words, this account’s credit balance is contrary to (or opposite of) the usual debit balance for an expense account. Contra equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock. In the financial statements the purchases account would be offset against the contra expense accounts to show the net purchases. Contra expense accounts have a natural credit balance, as opposed to the natural debit balance of a typical expense account. Therefore, a contra expense account that contains a debit balance must have a negative ending balance.
Contra Account Definition, Types, and Example
