Contra Account Definition, Types, and Example

The net amount is often referred to as the carrying amount or perhaps the net realizable amount. 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. By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes. For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately.

• They are used in case some customers won’t be able to pay the money they owe to the business.
• This would allow the company to track the amount of money that has been borrowed.
• Including contra accounts on a balance sheet is important as it allows for a more transparent view of a company’s financial position.
• Showing contra assets on your balance sheet allows potential investors to see how you write-down a depreciable asset, such as a piece of equipment.
• For example, an accounts receivable’s contra account is a contra asset account.

Liability Contra Account

By viewing these accounts — the parent and contra — in tandem, business owners can gain broader insights, preserve the historical figures stored in the parent account, and make accommodations for any relevant changes. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. The discount on bonds payable amount shows the difference between the amount of cash received when issuing a bond and the value of the bond at maturity.

Chart of Accounts Listing of Typical Contra Accounts:

This indicates that out of $100,000 sales, your customers return goods valued at $500. The company has a contra asset account for accumulated depreciation expense and a separate asset account for equipment cost. The contra asset account would be used to offset the equipment account on the balance sheet. For example, if the company purchased a computer for 1,000 and it had a five-year life expectancy using straight-line depreciation, the contra account would be debited for 200 each year (the 1,000 divided by 5 years). 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 of sales generated by a business on its income statement.

Understanding Contra Liability Accounts

This is done to entice customers to keep products instead of returning them. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. The allowance for doubtful contra revenue account accounts is used to reduce the net income by the estimated amount of uncollected receivables. This account helps to give a more accurate picture of the company’s financial position. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching.

The percentage of sales method assumes that a fixed percentage of goods or services sold by a company cannot be received. In other words, accumulated depreciation will be $10,000 each year until the car depreciates to $0 twenty years later. This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders. Angela Boxwell, MAAT, brings over 30 years of experience in accounting and finance. As the founder of Business Accounting Basics, she offers a wealth of free advice and practical tips to small business owners and entrepreneurs dealing with business finance complexities. Home Depot also devotes footnote 4 to its share repurchase program and reports that the company is authorized by its board to repurchase $20 billion in shares.

How are Contra Accounts Used and Reported?

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. We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R). For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.

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. Note that in accounting, the term “book value” is also used interchangeably with net value. Therefore, the book value of an asset in the books is equal to its historical cost (the debit balance of the asset) minus the related amount of contra asset in the balance sheet (the credit balance of the contra asset). The contra asset account of your equipment account is the accumulated depreciation of equipment.

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• These accounts will typically help track sales discounts, product returns, and allowances (e.g., a price reduction for a good with minor defects).
• These deductions are a common part of doing business, especially if you are trying to retain customers by offering them discounts from the list prices of your goods and services.
• Accumulated depreciation is the total of all depreciation that has been charged to existing fixed assets such as equipment and buildings.
• Contra revenue accounts typically offset revenue accounts in a firm’s income statement.
• For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense.
• And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand.

A contra equity account is an account that is used to offset another equity account on the balance sheet. Contra equity accounts are typically used for a company to buy back its stock or shares. A Contra liability account is an account that is used to offset another liability account on the balance sheet.

Example #2: Asset Contra Account