A contra account is an account with a balance opposite the normal accounts in its category. Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts. In other words, contra accounts are used to reduce normal accounts on the balance sheet.
What Are the Different Types of Contra Accounts?
The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment. 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.
What are the Different Types of Contra Accounts?
Contra accounts are more commonly paired with asset accounts, such as accounts receivable or inventory, to reduce the carrying values of those assets. A liability that is recorded as a debit balance is used to decrease the balance of a liability. It is not classified as a liability since it does not represent a future obligation.
How to Calculate Units of Activity or Units of Production Depreciation
Since we are unsure of exactly which customer would default his payment, we can’t directly credit the accounts receivable account or the accounts receivable subsidiary ledger. You can estimate the total to record in the allowance for doubtful accounts based on uncollectible revenue totals from the previous year or you can conservatively estimate the amount. When the company pays the cost of having the flyer printed, a journal entry is done. The purpose of the Sales Returns account is to track the reduction in the value of the revenue while preserving the original amount of sales revenue.
Main Elements of Financial Statements: Assets, Liabilities, Equity, Revenues, Expenses
The company uses Straight-Line Depreciation to track the loss of value of the asset over time. As evident from the table below, each contra account has a parent account whose normal balance is often exactly opposite of the normal balance of the relevant contra account. There is the existence of contra accounts in accounting which are accounts that have the purpose of decreasing the value of another specific account if the two accounts are netted or summed together.
- When the amount is material, the line item is typically presented separately on the balance sheet, below the liability account with which it is paired.
- For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance.
- When considering all of the money currently owed to your business that’s recorded in your Accounts Receivable (A/R) line item as an existing asset, there’s a good chance that not all of those customers are going to pay you back in full.
- The contra accounts will be grouped in the same category on the balance sheet or income statement as their related accounts.
- She has worked in multiple cities covering breaking news, politics, education, and more.
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 contra expense account asset account had a debit balance, this would indicate an error in the journal entries. In an accounting system, ledger accounts are designed to contain only similar transactions and/or balances.
This would let users of the financial statements calculate the book value of the liability. Whenever the balance of a contra asset account increases (credit to the contra asset account), the increased amount is written off as an expense and is reported in the company’s income statement. Both the asset and the corresponding contra asset accounts must be stated clearly in the balance sheet. Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset’s net value or book value.
- Accumulated depreciation reflects the reduction in value of a fixed asset.
- This means that the $85,000 balance is overstated compared to its real value.
- This type of account could be called the allowance for doubtful accounts or a bad debt reserve.
- Utilizing contra accounts in financial accounting has several significant advantages that enhance financial transparency and enable more effective financial management.
- And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand.
- The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets.
A contra revenue represents any deductions or offsets that need to be removed from gross revenue to provide a clearer understanding of actual income — such as in the example just provided. These accounts will typically help track sales discounts, product returns, and allowances (e.g., a price reduction for a good with minor defects). There is almost always a story behind data; a clarification or historical insight that changes the meaning behind raw figures. In a report, layering on that additional context can be easy, but in a general ledger, you have few options for conveying nuance and subtlety.
