Contra Account Definition, Types, and Example

Far less common is the obsolete inventory reserve, which reduces the overall inventory value on the balance sheet. This contra account holds a reserve, similar to the allowance for doubtful accounts. For each debit against the inventory account, there will be a corresponding credit against the obsolete inventory contra account. Reserve for obsolete inventory is a contra asset used to write down the inventory account if inventory is considered obsolete. Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods. In this scenario, a write-down is recorded to the reserve for obsolete inventory.

The difference between an asset’s balance and the contra account asset balance is the book value. The same is true for other asset accounts like accounts receivable. Accounts receivable is rarely reported on the balance sheet at its net amount. Instead, it is reported at its full amount with an allowance for bad debts listed below it. Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off. Examples of contra accounts include allowance for doubtful accounts, reserve for obsolete inventory, and accrued liabilities.

What Cash Receipts Are Not Revenue?

Sales returned for a refund are posted to the contra account to reduce gross revenue or return on sales. The other side of the transaction is posted to cash because there is no value in retaining the sales transaction in the cash account. Accounting contra asset accounts or contra revenue accounts follow a simple double-accounting procedure to eliminate errors in financial reporting. The most common way to account for contra accounts is to attach the regular account with its connected contra account underneath it on a company’s balance sheet. For example, the depreciation value will be listed underneath the value of a vehicle, or the allowance of bad debts will be attached to the accounts receivable. Another example could be when a product is bought and is returned at face value because of a defect.

The contra return on sales account will be debited while the normal cash account will be credited. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities include discount on notes or bonds payable.

List of Contra Accounts

A contra expense account is an account used to reduce the amount of an expense without changing the balance in the main expense account. Examples of contra expense accounts include Purchase Returns, Purchase Discounts, and Advertising Reimbursements. Accumulated Depreciation is a contra asset that pairs with Fixed Assets. Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset.

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Understanding Contra Accounts

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. Contra account is important as it not only allows a company to report the original amount of a transaction but also report any reductions that may have happened so that the net amount will also be reported. They are useful in preserving the historical value in the main account while presenting a write-down or decrease in a separate contra account that nets to the current book value. Contra accounts serve an invaluable function in financial reporting that enhances transparency in accounting books.

• Asset accounts usually have a positive value which is the same as a debit balance.
• Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc.
• Contra asset accounts include allowance for doubtful accounts and accumulated depreciation.
• Contra accounts act like regular accounts on the balance sheet but have a unique purpose.
• Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a credit
  balance.
• Contra liabilities reduce liability accounts and carry a debit balance.

Business owners should understand the functions of contra accounts and their importance to maintaining accurate financial records. 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. Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company. For example, if a company just reported equipment at its net amount, users would not be able to observe the purchase price, the amount of depreciation attributed to that equipment, and the remaining useful life. Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset.

Requirements of contra asset accounts:

Sometimes, it is important to keep the original balance of the accounts and create the contra accounts to be able to calculate the net value of the account. Whenever the balance of an account needs to be reduced in a company’s ledger, it is not always applicable to credit the account if it is an asset or debit the account if it is a liability. Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts.

This type is paired with the asset account, which allows a business to record the original price or value of the asset at time of purchase. The contra asset account then allows recording of the value factoring in depreciation. Your bank account, the inventory you currently stock, the equipment you purchase, and your accounts receivable balance are all considered asset accounts. 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. Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset. When the amount recorded in the contra revenue accounts is subtracted from the amount of gross revenue, it equals the net revenue of a company.

Contra assets are accounts in the general ledger—where you enter your transactions—that carry a balance used to offset the account with which it is paired. Instead of debiting the asset account directly, the contra asset account balance will be credited (reduced) separately. The outstanding balance of a contra asset account represents a credit figure. These accounts are maintained individually and are adjusted from the corresponding asset’s balance to show the net amount of the assets in financial statements. The amount for estimated uncollectible accounts is a bad debt operating expense. The allowance for doubtful accounts is the contra account that reduces the accounts receivable to an estimated realizable amount.

Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock. This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders. Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values. Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

This process will give rise to a contra asset account which is the discount on notes receivables. Contra accounts are a significant part of a company’s financial statements. These accounts can significantly reduce balances on the balance sheet. A company’s financial accounts will usually have three types of items. Assets are debit balances that include resources with expected positive future economic benefits. The accumulated depreciation account is perhaps the most common contra asset account used by business owners.