Contra Account: A Complete Guide + Examples

The main reason is to make the remaining shares more valuable, as their prices are expected to rise after the stock buyback. Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values. Reserve for obsolete inventory, the counterpart of inventories. Accumulated depreciation is the counterpart of depreciable assets. For example, a company has provided services to its customer for $10,000 with a sales discount of 2%. When a corporation buys back its shares that have been previously issued, it is recorded as a Treasury Stock.

The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables. The difference, which is $500, is thus listed as a discount on bonds payable and is debited to the contra liability account “discount on bonds payable.” Accumulated Depreciation contra account contains the cumulative sum total of all the depreciation expenses that have been charged against those fixed assets over time. 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.

How to Use Contra Asset Accounts

And the depreciation for the office equipment ended up at $1,000. Contra asset accounts are useful tools in double-entry accounting. They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting. 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. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation.

When we add the balances of these two assets, we will get the net book value or carrying value of the assets having a debit balance. These contras reduce the equity account and carry a debit balance. Contra equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock. Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable. They are used in case some customers won’t be able to pay the money they owe to the business. Contra liability accounts are special accounts in the liabilities section of the balance sheet.

What is a Contra Asset?

If a https://bookkeeping-reviews.com/ has a high or fast-growing allowance as a percentage of accounts receivable, keep a close eye on it. It could be growing with bad accounts, and cash flow will be affected. To oppose the revenue made by a company, contra revenue accounts must have a debit balance. The most common contra equity account is called “treasury stock.” This special account decreases the number of shares outstanding in the market because the company repurchases some of the shares from its buyers. Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks. The most common type of contra account is the contra-asset account.

• Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.
• Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value.
• The basis of property is increased by capital returns and decreased by capital expenditures.
• As mentioned above, the primary situation in which contra asset accounts appear has to do with accumulated depreciation.

DepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. Financial Statements Of Any OrganizationFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period . Fixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time.

Understanding a Contra Account

The contra revenue account is a reduction from gross revenue, which results in net revenue. These transactions are reported in one or more contra revenue accounts, which usually have a debit balance and reduce the total amount of the company’s net revenue.

For example, when depreciating an asset, the accumulated depreciation account is used to reduce the book value of the asset while also keeping track of the total amount of depreciation that has been posted to date. Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers. The amount is not reported, and the net sales amount is reported on the income statement. Credit BalanceCredit Balance is the capital amount that a company owes to its customers & it is reflected on the right side of the General Ledger Account. Usually, Liability accounts, Revenue accounts, Equity Accounts, Contra-Expense & Contra-Asset accounts tend to have the credit balance.

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. You don’t have to, yet even a small business will benefit by using the contra asset account for accounts receivable. This eliminates the need to write off large accounts receivable balances at year end since they’ve already been accounted for.

• He is a professor of economics and has raised more than $4.5 billion in investment capital.
• A less common example of a contra asset account is Discount on Notes Receivable.
• Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years.
• The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet.
• Another contra asset account is Allowance for Doubtful Accounts.
• The contra equity account reduces the total amount of shareholders’ equity.

Revenue AccountRevenue accounts are those that report the business’s income and thus have credit balances. Revenue from sales, revenue from rental income, revenue from interest income, are it’s common examples. Accordingly, the value of the contra asset account will change. Also, with IFRS asking to report it in a particular way, the accountants must be updated with recent changes to how the contra assets account should appear in the books of accounts.

A business might elect to separately state contra asset accounts on its balance sheet, so that the users of its financial statements can obtain additional information about the contents of these accounts. The contra revenue accounts commonly used in small-business accounting include sales returns, sales allowance and sale discounts. A contra revenue account carries a debit balance and reduces the total amount of a company’s revenue. The amount of gross revenue minus the amount recorded in the contra revenue accounts equal a company’s net revenue. A transaction is made under the sales return account when a customer returns a product to the company for a refund. Sales allowance represents discounts given to customers to entice them to keep products instead of returning them, such as with slightly defective items. The sales discount account represents the discount amount a company gives to customers as an incentive to purchase its products or services.

If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative. On the other hand, if you’re looking at a high-flying growth stock that reports new revenue growth records each quarter but has a massive allowance for doubtful accounts, there may be problems ahead. Outstanding SharesOutstanding shares are the stocks available with the company’s shareholders at a given point of time after excluding the shares that the entity had repurchased.