Contra Account: Definition, Types & Examples
In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000. If the asset account had a credit balance or the contra asset account had a debit balance, this would indicate an error in the journal entries. A contra asset account is an account in the balance sheet that offsets the balance of a regular asset account. In this example, the contra liability account (Discount on Bonds Payable) is used to provide a more accurate and detailed representation of the company’s liability position. By accounting for the discount on the bonds issued, Green Energy Corp. can track its actual liabilities more effectively and make more informed decisions about its financing strategies. The revenue contra accounts Sales Returns, Discounts and Allowances are subtracted from the main Sales Revenue account to present the net balance on a company’s income statement.
- When the company pays the cost of having the flyer printed, a journal entry is done.
- 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.
- Contra liability accounts are mainly used by corporations that issue bonds frequently.
This allows the company to record the expense and the corresponding payment in separate accounts and still maintain an accurate representation of its financial position. For example, the account “Accrued Expenses Payable” is a liability account that has a credit balance. This means that when a company incurs an expense but does not pay for it immediately, it records the expense as a credit to the Accrued Expenses Payable account. The contra-liability account for Accrued Expenses Payable is “Accrued Expenses,” which has a debit balance. The list of asset accounts on your general ledger and balance sheet conveys the combined, potential value of all of the tangible and intangible items that your organization possesses. But in the real world, converting all of that potential into hard cash is highly unlikely, if not impossible.
What Are the Different Types of Contra Accounts?
Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Offsetting the asset account with its respective contra asset account shows the net balance of that asset. In finance, a contra liability account is one that is debited for the explicit purpose of offsetting a credit to another liability account.
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. 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. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation.
Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. 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. So an Accumulated Depletion account would serve as the contra for the parent Fixed Asset account. Consider a business that offers an early payment discount to its customers, cutting their invoiced total by 3% if they pay within 1 week of invoicing.
A normal asset has a debit balance, while a contra asset sits against this to show the net balance of both assets on your financial statement. 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. On the balance sheet, the net liability for the bonds payable will be reported as $980,000 ($1,000,000 – $20,000), reflecting the impact of the discount on bonds payable.
Presentation of Contra Liability Accounts
A company creates allowances for doubtful accounts to record the portion of accounts receivable which it believes it will no longer be able to collect. The amount in allowance for doubtful accounts is deducted from the accounts receivable account of a company. A contra account is also known as a valuation allowance, because it adjusts the carrying value of the account with which it is paired. The following are examples of commonly-used contra asset accounts you could create to better understand your business financials. However, it’s important to keep in mind that you can create any contra account you want to more clearly describe your business — this is not an exhaustive or definitive list. By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount.
These accounts are crucial in the financial reporting process, as stated above. These balances come from an underlying accounting or accumulation of accounts from the financial systems. However, allowance for doubtful accounts and bad debt expenses some items may also reduce the total reported amount on these accounts. Contra accounts serve an invaluable function in financial reporting that enhances transparency in accounting books.
What is a contra-liability account?
In a sales returns and allowances contra revenue account, you offset the balance in the sales revenue account. When the contra account reads $500 and the normal credit balance is $100,000, then your net sales are $99,500. This indicates that out of $100,000 sales, your customers return goods valued at $500. Contra equity accounts are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds. Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances.
Contra Liability Account: What it is, How it Works, Example
By understanding the nature and function of contra accounts, businesses can accurately reflect their financial position, providing transparency to stakeholders such as investors, creditors, and internal management. As your business acquires new assets (e.g., machinery, office equipment, vehicles), you record the initial purchase value in your Fixed Asset account. But these items don’t retain that initial value; if liquidated, they would likely be sold at a loss. In order to record this ongoing value drop, you would use a corresponding contra account — an Asset Depreciation account. In its general ledger, the business will want to capture its gross sales figures and the actual value of the discount. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value.
Contra asset account example
Likewise, drawing means to withdraw money from the business for personal use. In other words, accumulated depreciation will be $10,000 each year until the car depreciates to $0 twenty years later. The auditors aim to keep the balances at their adequate levels, but the controller might want to keep them as low as possible to reduce expenses and maximize profit levels. A contra account is used to show the opposite effect or reduction of a related account. Rather than pay this cost up-front and tie up a significant chunk of capital, Show-Fleur makes this purchase on credit with a 90-day due date after invoicing. Fortunately, the seat vendor offered an early payment discount of 5%, meaning that when Show-Fleur paid off its full credit note within the first 30 days, it recouped $30 thousand in savings.
Definition of Contra-Liability Account
Instead, you need to record this value gap, and a contra asset account serves that purpose. 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.
A contra account is a general ledger account with a balance that is the opposite of another, related account that it is paired with. The B/S impact is where the contra liability comes into play, i.e. the historical value of the debt is not impacted by the OID. In spite of its name, contra liabilities function more similarly to assets. Emilie is a Certified Accountant and Banker with Master’s in Business and 15 years of experience in finance and accounting from corporates, financial services firms – and fast growing start-ups. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean.
In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000. If the asset account had a credit balance or the contra asset account had a debit balance, this would indicate an error in the journal entries. A contra…