What is a Contra Account?

A contra expense account is a general ledger expense account that will intentionally have a credit balance (instead of the debit balance that is typical for an expense account). In other words, this account’s credit balance is contrary to (or opposite of) the usual debit balance for an expense account. Contra expense accounts have a natural credit balance, as opposed to the contra expense account natural debit balance of a typical expense account. Therefore, a contra expense account that contains a debit balance must have a negative ending balance. While tracking contra asset accounts is cumbersome for bookkeepers and accounting clerks using manual accounting systems, if you’re using accounting software you’ll find that most of the heavy lifting is done for you.

• An estimate of bad debts is made to ensure the balance in the Accounts Receivable account represents the real value of the account.
• A business called Show-Fleur offers private driving tours of local botanical gardens — all from the comfort of high-end limousines.
• In either case, using these accounts can help you better manage depreciation expense, keep your accounts receivable balance accurate, and properly dispose of and account for obsolete inventory.
• In this scenario, a write-down is recorded to the reserve for obsolete inventory.
• Another common contra liability account is a Discount on Bonds Payable account used by businesses that issue their own bonds.

Is Unearned Revenue a Contra Account?

• The company predicts which accounts receivable won’t be paid by customers and writes those off.
• The use of a contra account allows a company to report the original amount and also report a reduction so that the net amount will also be reported.
• For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
• 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.
• He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries.
• 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.

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. 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.

What is Accrual Based Accounting? (Accrual Basis Explained)

• The company uses Straight-Line Depreciation to track the loss of value of the asset over time.
• For example, we need to keep the face value of a bonds payable and the premium amount in separate ledger accounts even though both have credit balances.
• Treasure stock is a good example as it carries a debit balance and decreases the overall stockholders’ equity.
• With the appropriate level of automation integration in your chosen tool, you can pull the relevant values into these individual accounts directly from invoices, credit agreements, and other documentation.
• This depreciation is saved in a contra asset account called accumulated depreciation.
• For instance, if a company has a plant asset such as Equipment with a debit balance of $92,000 and the account Accumulated Depreciation has a credit balance of $50,000, the carrying amount (or book value) of the equipment is $42,000.
• It is important to realize that unearned revenue is not a contra revenues account.

When a company repurchases shares, it increases the fractional ownership of all remaining shareholders. Sometimes, we have an ancillary balance whose normal balance is the same as that of the parent account. For example, we need to keep the face value of a bonds payable and the premium amount in separate ledger accounts even though both have credit balances.

Understanding contra accounts

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. Contra asset accounts include allowance for doubtful accounts and the accumulated depreciation. Obsolete, Unsold and Unusable Inventory are contra asset accounts with a credit balance that reduce the normal debit balance of the main Inventory asset account in order to present the net value of inventory on a company’s balance sheet. 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.

AccountingTools

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. Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset. Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc.

• A debit will be made to the bad debt expense for $4,000 to balance the journal entry.
• Typically, these notes reflect purchases made on credit by your customers.
• After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.
• The benefit of using the contra expense account is that the company’s managers can see in account 4210 the total amount that the company paid to the health insurance company.
• This will ensure the net value of accounts receivable at year-end is not overstated.
• The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount.

Contra liabilities