What is a Contra Account?
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. The allowance for doubtful accounts is used to reduce the net income by the estimated amount of uncollected receivables. This account helps to give a more accurate picture of the company’s financial position. I have written notes to financial statements that have been filed with the SEC.
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. While accumulated depreciation is the most common contra asset account, the following also may apply, depending on the company. In the above example, the debit to the contra liability account of $100 lets the company recognize that the bond was sold at a discount. Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. As a reminder, assets and expenses are debit accounts whereas liabilities and revenues are credit accounts.
What is Contra in Accounting?
The difference between an asset’s balance and the contra account asset balance is the book value. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Accumulated depreciation reflects the reduction in value of a fixed asset. For example, when a line item on your balance sheet presents the balance of accounts receivable, report the value of allowance of uncollectible accounts below the accounts receivable line.
The reimbursements from employees are recorded in a benefits contra expense account, which results in a reduced total benefits expense for the company. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. The cost of goods sold (COGS) account will have a debit balance of $100,000, representing the initial cost of the inventory.
Is a Contra Account a Debit or Credit?
One other type of account is the contra account and for accountants, this is a must-know. However, that $1.4 billion is used to reduce the balance contra expense of gross accounts receivable. Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount.
The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet. Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares.
Journal Entry for Discount on Bonds Payable
In the USA, bank loans with more than ninety days’ arrears become “problem loans”. The debit balance in the Discount on Bonds Payable account will gradually decrease as it is amortized to Interest Expense over their life. A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. You can estimate the total to record in the allowance for doubtful accounts based on uncollectible revenue totals from the previous year or you can conservatively estimate the amount. Let’s remember that $1,000 is probably not material to the financial statements.
- Emilie is a Certified Accountant and Banker with Master’s in Business and 15 years of experience in finance and accounting from corporates, financial services firms – and fast growing start-ups.
- Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.
- By reflecting both accounts on the balance sheet, analysts can understand both the original price and the total decrease in value of a certain asset over time.
- To offset this, the allowance for doubtful accounts balance is adjusted via a credit, while the bad debt account is debited to balance out the AR account.
- Similarly, accumulated depreciation accounts reduce the value of the fixed assets you report on your financial statements.
- Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement.
While the phrase “to meet the requirement of Company B” is stated, I understood it to mean that there were NO services rendered by Co. We (and I’m talking the average CFO/Controller/Finance & Accounting professional) as professionals need to question GAAP and start pushing back when the principles (correctly spelled) and/or rules deviate too far from reasonable. We are just as capable as the SEC staffer or member of FASB to think, reason and analyze (the fundamentals of an accounting) to voice an opinion where and when deviation starts taking a wrong track. On the note of posting contrarian opinions, I find that we as Americans are very hesitant to question anything. They don’t walk the halls of an elementary school, and they’re not deposited into a bank to earn interest. You can rationalize it all sorts of ways, and you’ve certainly tried, but simply listing a few accounting principles you heard about in Accounting 101 doesn’t justify ignoring others.
Allowance for uncollectible accounts, or allowance for doubtful accounts, is one of the most common contra current asset accounts. The dollar balance in the allowance for uncollectible acounts is the amount you don’t expect to collect, and this offsets the amount you report in accounts receivable. Reserve for obsolete inventory is a contra asset account 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.