What Is a Contra Account? The Motley Fool

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. 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. Contra assets give investors a better picture of how you use your assets over time. A doubtful debts contra account allows for future write-offs of accounts receivable. Although you have not officially written off these debts yet, you show them to be a negative balance because you don’t believe the customer will pay you. The reason you show a contra asset on a balance sheet is so you can see the overall net balance of a particular asset and to give investors a more accurate look into your company’s financial activity.

What Are Examples of a Contra Asset Account?

The Allowance for Doubtful Accounts is used to track the estimated bad debts a company my incur without impacting the balance in its related account, Accounts Receivable. An estimate of bad debts is made to ensure the balance in the Accounts Receivable account represents the real value of the account. Allowance for Doubtful Accounts pairs with the Bad Debts Expense account when doing adjusting journal entries.

Sales Discounts

These contra revenue accounts tend to have a debit balance and are used to calculate net sales. A contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability. The sales discounts contra revenue account records the discounts given contra expense account to customers on sales made to them, normally a cash or settlement discount. The account is normally a debit balance and in use is offset against the revenue account which is normally a credit balance. Consequently the net balance of the two accounts shows the net value of the sales after discounts.

Contra accounts are worth a look

This general structure can be applied across all contra types, so if the parent account has a credit, the contra account will have a debit. Similarly, if the parent account lists entries as debits, the contra account will appear as a credit. A contra account provides missing context by pairing it with a related account.

Chart of Accounts Listing of Typical Contra Accounts:

Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value. For the purpose of presentation on primary financial statements, we are often concerned only with the net figure of two similar classes/balances which we determine by subtracting one account from the another. For example, it is not very useful to show the PPE cost account and the related accumulated depreciation account separately on the balance sheet. We are better off subtracting the accumulated depreciation account (the contra account) from PPE cost account (the parent account) to arrive at the net balance of the PPE. When a contra asset account is first recorded in a journal entry, the offset is to an expense.

• Contra expense accounts have a natural credit balance, as opposed to the natural debit balance of a typical expense account.
• Anytime you need to depreciate an asset, you’ll use an accumulated depreciation contra asset account, which records the amount of depreciation that has been expensed while offsetting the value of the asset being depreciated.
• The equity section of the balance sheet is where the shareholder’s claims to assets are reported.
• When the account receivable is written off, it is added to bad debt expense on the income statement and placed in the contra account.
• When the contra account reads $500 and the normal credit balance is $100,000, then your net sales are $99,500.
• Then in account 4211 they can see the portion of the cost that was paid by the employees.
• Contra Equity Account – A contra equity account has a debit balance and decreases a standard equity account.

Expense accounts and the contra expense accounts with which they are paired are typically combined in the income statement in a single line item, so that readers are not aware that a contra account even exists. 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. If you offer credit terms to your customers, you probably know that not all of them will pay. Creating this contra asset account builds in a safeguard against overstating your accounts receivable balance. Anytime you need to depreciate an asset, you’ll use an accumulated depreciation contra asset account, which records the amount of depreciation that has been expensed while offsetting the value of the asset being depreciated. Sometimes, we have an ancillary balance whose normal balance is the same as that of the parent account.

• Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns.
• Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value.
• Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting.
• At the same time, our Accounts Receivable Automation software and Accounts Payable Automation software makes tracking, managing, and processing crucial assets and liabilities — and their contras — easier than ever before.
• Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean.
• A contra account is an account with a balance opposite the normal accounts in its category.