Contra Account: A Complete Guide + Examples

This account offsets the balance in the respective asset account that they pair with on the balance sheet. Nova Incorporated is attempting to finalize their balance sheet in terms What is a Contra Asset Account – Definition and Example of the net value of their assets. The amount in the accumulated depreciation account is deducted from the assets of a company, such as buildings, vehicles and equipment. This can help anyone viewing the financial information to find the historical cost of the asset.

When this happens, the debit will be added to the expense account Bad Debt Expense and the credit will be added to the asset account, Allowance for Doubtful Accounts. 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. In order to balance the journal entry, a debit will be made to the bad debt expense for $4,000.

What Does Contra Account Mean?

Whether reported as separate lines on the financial report or as a cumulative value, the net amount of the pair of accounts is called the “net book value” of the individual asset. Notes receivables are promissory notes that include a promise from a borrower to repay a lender. Companies that hold inventories for a long time may face accumulating obsolete inventory.

Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. In bookkeeping, a contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit (negative) balance. The account offsets the bookkeeping for startups balance in the respective asset account that it is paired with on the balance sheet. Regardless of that, allowance for receivables accounts will exist for all companies that have account receivable balances. This account helps companies present a more accurate accounts receivable balance on the financial statements.

How to Record a Contra Account

These include accumulated depreciation, accumulated amortization, allowance for receivables, obsolete inventory, and discount on notes receivables. For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets. 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. The difference between an asset’s balance and the contra account asset balance is the book value.

• Contra liability accounts such as discount on bonds payable and discount on notes payable usually carry debit balances.
• The size of the reserve also reveals the amount of bad debt that the company expects to experience from the current set of receivables.
• This is done by separating the decreases that have occurred in the contra account from the original transaction amount.
• Examples of contra accounts include Allowance for Doubtful Accounts, Accumulated Depreciation, and Return on Sales.

The contra account definition in business accounting is an account used in the general ledger for the purpose of reducing the amount in another account related to it. A general ledger is a comprehensive list of all accounts and their connected transactions in a business. A contra account balances the numbers from two or more accounts that are compared on the balance sheet. Normal accounts https://www.apzomedia.com/bookkeeping-startups-perfect-way-boost-financial-planning/ on the general ledger will usually have a debit balance, while contra accounts are typically either zero or hold a negative credit balance. When a contra asset account is first recorded in a journal entry, the offset is to an expense. 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.

Contra Asset Account

To oppose the revenue made by a company, contra revenue accounts must have a debit balance. 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. 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. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance.

A less common example of a contra asset account is Discount on Notes Receivable. The credit balance in this account is amortized or allocated to Interest Income or Interest Revenue over the life of a note receivable. If a listed company purchases its own shares from the open market, it will have to debit the treasury stock account in order to record the transaction. A company might decide to purchase its stock when the board of directors feel the stock is undervalued or when it wishes to pay its shareholders dividends.

Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement. Contra revenue accounts typically offset revenue accounts in a firm’s income statement. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.