Understanding their purpose, types, and application is fundamental for accounting professionals and learners alike to ensure accurate financial reporting and informed decision-making within organizations. The contra asset account Accumulated Depreciation is deducted from the related Capital Assets to present the net balance on the parent account in a company’s balance sheet. 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. As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find. Companies bury them in the footnotes and often don’t break out the actual calculation.
Contra Account Definition, Types, and Example
Contra accounts are a significant part of a company’s financial statements. These accounts can significantly reduce balances on the balance sheet. There are three contra asset accounts that commonly appear in an organization’s chart of accounts. In either case, using these accounts can help you better manage depreciation expense, https://www.chad-caleb.info/on-my-rationale-explained-10/ keep your accounts receivable balance accurate, and properly dispose of and account for obsolete inventory. 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.
Everything You Need To Master Financial Modeling
When a contra asset transaction is created, the offset is a charge to the income statement, which reduces profits. However, the “Allowance for Doubtful Accounts” (or “Allowance for Uncollectible Accounts”) is a contra account related to the concept of bad debts. This contra-asset account reduces the accounts receivable balance on the balance sheet to its net realizable value.
What is a contra account?
For example, accumulated depreciation will go along with related assets. An asset account which is expected to have a credit balance (which is contrary to the normal debit balance of an asset account). For example, the contra asset account Allowance for Doubtful Accounts is related to Accounts Receivable.
The Contra Liability Account
After one year, the Equipment account shows $40,000 ($50,000 – $10,000), and Accumulated Depreciation shows $10,000. Contra asset accounts help companies record any reductions to their https://www.zdorovih.net/modules.php?name=News&file=view&news_id=1967 non-current and current assets. By doing so, they can bring their asset accounts to a more accurate position. Contra asset accounts are necessary for companies for various reasons.
Still, it is important when possible to consider how the net accounts are calculated and be wary of companies that are reporting a ton of bad debts. The equity section of the balance sheet is where the shareholder’s claims to assets are reported. The main contra equity account is http://bizrussia.ru/obj/view/100839 treasury stock, which is the balance of all stock repurchased by the company. When a company repurchases shares, it increases the fractional ownership of all remaining shareholders. Every contra asset account on a company’s accounting records will also have a pairing account.
- The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation.
- In bookkeeping terms, a contra asset account refers to an account which is offset against an asset account.
- For each debit against the inventory account, there will be a corresponding credit against the obsolete inventory contra account.
- Treasury stock represents shares of a company’s own stock that it has repurchased from shareholders but not retired.
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. Therefore, these companies must maintain an obsolete inventory reserve account to net off any unusable stock from the account. This requirement also comes from the accounting standard for inventories. However, there are some prevalent contra-asset accounts that may exist for all companies. This account offsets the balance in the respective asset account that they pair with on the balance sheet. A contra account is an account that companies use to reduce the value of a related account.
Example #2: Asset Contra Account
For instance, it is common to keep the purchase price of a piece of equipment as a historical cost in the debit asset account when it comes to fixed assets. A debit will be made to the bad debt expense for $4,000 to balance the journal entry. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000.
For stakeholders, looking at both accounts is also crucial in their decision-making process. Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a creditbalance. 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. In other words, contra revenue is a deduction from gross revenue, which results in net revenue.