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Contra Account Definition, Types, and Example

[ September 7, 2021   //   Gary G Burrows ]

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. A contra account is a general ledger account with a balance that is opposite of the normal balance for that account classification. The use of a contra account allows a company to report the original amount and also report a reduction so that the net amount will also be reported. The net amount is often referred to as the carrying amount or perhaps the net realizable amount. On the other hand, accumulated depreciation is a contra-asset account. The accounting entries for a discount on notes receivables are as follows.

• Accumulated depreciation is the most prevalent type of contra-asset account.
• Usually, companies add to the accumulated depreciation account after every accounting period.
• The difference between an asset’s balance and the contra account asset balance is the book value.
• A contra asset account is an asset account with a natural credit balance.

Contra liability accounts are less commonly used than https://solidar.ru/the-court/sistema-registracii-lekarstvennyh-sredstv-v-ramkah-edinogo-rynka-evropeiskogo-soyuza-i-evraziiskogo-e.htmls. Contra liability accounts are mainly used by corporations that issue bonds frequently. That is because some of the bonds are issued at a discount, so this reduces the balance of their bonds payable.

What is a Contra Asset Account? Definition, Types, Example, and More

To compensate for those potential deadbeat customers, you can use a Bad Debts account to serve as a contra for your A/R. This account serves two purposes — tracking total depreciation expenses while providing you with the accurate book value of the asset being depreciated. 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. 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. The definition can be expanded to include contra accounts in general. Contra accounts act like regular accounts on the balance sheet but have a unique purpose.

You may not need to use contra asset accounts right now, but as your business grows, using contra asset accounts will likely become a necessity. Writing off your obsolete inventory in this manner allows you to expense the cost of the obsolete inventory while also decreasing your current inventory balance using the contra asset account. Inventory obsolescence is an expense account, while the allowance for obsolete inventory is a contra asset account, which aims to reduce the inventory valuation on your balance sheet. While accumulated depreciation is the most common contra asset account, the following also may apply, depending on the company. A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger. This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000.

Everything You Need To Master Financial Modeling

This account helps to give a more accurate picture of the company’s financial position. This question is asked by many students, accountants, and http://gamoova.ru/learnedheret228.htm professionals. This article will give you the definition of contra in accounting, talk about different contra accounts, and give examples.

• Because contra asset accounts are used so frequently, it’s worth spending a little bit more time on them here, including common subtypes.
• The most common contra type, contra assets, records the loss in value of any asset accounts listed in your general ledger.
• This type of account could be called the allowance for doubtful accounts or a bad debt reserve.
• Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance.

A customer returned $100 worth of items, claiming them to be defective. Contra liability accounts are special accounts in the liabilities section of the balance sheet. This would let users of the financial statements calculate the book value of the liability. However, that $1.4 billion is used to reduce the balance of gross accounts receivable. Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount. For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account.

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The main advantage of using a http://www.sport2002.ru/r/ is to separate this reduction from the asset account with which it is paired. By doing so, you can more clearly see the total amount of the related asset account, which would otherwise have been obscured by the offsetting amount of the reserve. The proper size of a contra asset account can be the subject of considerable discussion between a company controller and the company’s auditors. The auditors want to ensure that reserves are adequate, while the controller is more inclined to keep reserves low in order to increase the reported profit level.

It might be important for a business to track the full cost of sales less contras to see the full picture. 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. You’ll continue to use the contra asset account until the equipment has been completely depreciated, retired, or sold.

Types of Contra Accounts

Contra asset accounts can be used in a variety of areas, but there are three contra asset examples that you should pay close attention to. For example, if the balance of accumulated depreciation increases from $20,000 to $50,000, this means that the depreciation expense amounts to $30,000, which will be listed in the income statement. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. Accounts Receivable is an asset account that represents the amount of money due to a business for goods or services that have been delivered or used but not yet paid for by customers. Contra asset accounts also help companies keep their general ledgers organized.