Contra Account Definition, Example

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 accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. Therefore, sales returns and allowances is considered a contra-revenue account, which normally has a debit balance. Contra accounts appear on the same financial statement as the related account.

Journal entries for this account allows returns and allowances to be tracked and reveal trends. In accounting, a contra account is where the adjustments and transactions with contrasting effects on the parent account are recorded. Learn more about the definition of a contra account and the concept of accounting to the contrary, and explore examples of such an account and its impacts on a business’s bottom line.

• Totaling of all debits and credits in the general ledger at the end of a financial period is known as trial balance.
• Contra entries are those entries in which same account can be debited and credited in contrary situation.
• The account offsets the balance in the respective asset account that it is paired with on the balance sheet.
• Accounts payable is the amount of money owed by companies that use or buy other resources from external providers.
• A contra account is used for account classification and is also reported in a company’s financial statement alongside its corresponding or related account.
• Expenses are the expenditure of the company done to acquire an asset or a service.

Travel Expense – some business activities require travel and transportation. This could include the cost of fare, vehicle rentals, airfare, etc. However, travel expense is not exclusive to the cost of transportation. Any necessary expenses incurred during the duration of the travel are also included. Examples are the cost of lodging, meals, rental of computers and other communications devices during the travel, etc. For businesses that are in the manufacturing industry, the cost of sales will include the cost of direct labor, direct materials, and manufacturing overhead attributable to products sold.

What Transactions Are Recorded In Cash Book?

A company creates allowances for doubtful accounts to record the portion of accounts receivable which it believes it will no longer be able to collect. The amount in allowance for doubtful accounts is deducted from the accounts receivable account of a company. The allowance method of accounting enables a company to determine the amount reasonable to be recorded in the contra account.

This should always match net income calculated on the income statement. Professional firms like Law Firms or even accounting firms may use an account called “Unbilled Accounts Receivable’.

Academic Research On Contra Accounts

Include buildings, machinery, office equipment, furniture, vehicles, etc. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount. Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset. Assume that a company uses a contra expense account to record the amounts that employees paid toward the company’s health insurance costs. For instance, the company might debit its expense account 4210 Employee Health Insurance Expense when recording the insurance company’s invoice of $10,000.

Let’s go over how they work and what the main types are, and then finish with an example. At the end of the first year, the net value of the equipment would be $300,000 – $50,000 in accumulated depreciation, so the net value of the equipment at the end of the first year would amount to $250,000.

How To Invoice A Quickbooks Customer For Reimbursable Expenses

The difference between an asset’s account balance and the contra account balance is known as the book value. When a business has incurred an expense but has not yet paid for it, a corresponding liability account should be recognized which is referred to as accrued expenses. It’s important to separate operating expenses and non-operating expenses in the income statement. This could include the above-mentioned financing expenses, and other expenses such as losses from one-time transactions (e.g. disposal of an asset, damage due to fire, impairment). In most income statements prepared by companies, financing expenses are a separate line item usually presented after the operating expense or EBIT .

Unlike regular assets and liabilities, contra assets typically keep a credit balance and contra liabilities typically keep a debit balance. Sales discounts are deducted from gross sales to arrive at the company’s net sales. Hence, the general ledger account Sales Discounts is a contra revenue account. The contra asset account, accumulated depreciation, is always a credit balance.

But the customer typically does not see this side of the transaction. 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. Allowance for Doubtful Accounts contra asset account decreases the value of accounts receivable by an estimate of uncollectible receivables to show their net realizable value on a balance sheet.

For businesses that deal with retail or wholesale of products, the cost of sales includes all of the cost of the products that are sold. At the end of the month, the smaller amount in his account from one ledger is transferred to his account in the ledger with large amount.

How Is A Contra Account Used?

In double entry bookkeeping terms, a contra expense account refers to an account which is offset against an expense account. Another description of a contra expense account is an account that reduces or offsets the amounts reported in one or more of the other general ledger expense accounts.

This amount may appear on a company’s balance sheet, and it can ultimately result in a reduction in the gross amount of a business’s fixed assets. A contra asset account is a type of asset account where the account balance may either be a negative or zero balance. There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra liabilities reduce liability accounts and carry a debit balance. Contra equity accounts carry a debit balance reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance.

What Are Contra Liabilities?

Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance. The normal balance for asset and expense accounts is the debit side, while for income, equity, and liability accounts it is the credit side. An contra expense account account’s assigned normal balance is on the side where increases go because the increases in any account are usually greater than the decreases. A contra account is used for account classification and is also reported in a company’s financial statement alongside its corresponding or related account.

It is a general ledger account with a purpose to have its balance to be the opposite of the original balance for that account. It is linked to specific accounts and is reported as reductions from these accounts. In this lesson, we’ll discuss types of accounting errors that affect the trial balance and errors that do not affect the trial balance. See accrual vs. cash basis accounting examples, and identify benefits of the two types of accounting. A contra account is an account used in a general ledger to reduce the value of a related account. She is an expert in personal finance and taxes, and earned her Master of Science in Accounting at University of Central Florida.

Eying the Trial Balance When reviewing the trial balance for errors, the first step is to eye the accounts to see that each account’s balance is in the proper debit or credit column. When Correct Account Balances May Not Be Normal Generally, an account balance that is not normal is incorrect, but there are exceptions. For example, if a company overdraws its bank account, the Cash account will have a temporary credit balance. Debit BalanceIn a General Ledger, when the total credit entries are less than the total number of debit entries, it refers to a debit balance.

Is A Contra Account A Debit Or Credit?

The two common contra liability accounts, discount on bonds payable and discount on notes payable, carry normal debit balances. The discount on bonds payable represents the difference between the amount of cash a company receives when issuing a bond and the value of the bond at maturity. Notes payable represents a liability created when a company signs a written agreement to borrow a specific amount of money. The lender may offer the company a discount if it repays the note early. The discount on notes payable reduces the total amount of the note to reflect the discount given by the lender.

Examples of expense accounts are Costs of Sales, Cost of Goods Sold, Costs of services, Operating expense, Finance Expenses, Non-operating expenses, Prepaid expenses, Accrued expenses and many others. Insurance companies carry prepaid insurance as current assets on their balance sheets because it’s not consumed. When the insurance coverage comes into effect, it goes from an asset and is charged to the expense side. A contra account makes allowances for payments in the form of products or services rather than cash. We’ll define contra below as well as discuss how to record a contra invoice in your accounts. In Account Form, your assets are listed on the left-hand side and totaled to equal the sum of liabilities and stockholders’ equity on the right-hand side. Sometimes total liabilities are deducted from total assets to equal stockholders’ equity.

Repairs and Maintenance – this refers to the cost of repairing and maintaining long-term assets such as machinery, equipment, furniture and fixtures, buildings, etc. Depending on the amount, the cost of repair and maintenance can either be capitalized or recognized as an expense. For example, replacing the bolts and nuts of a piece of equipment to be able to put it on an acceptable operating level is considered an expense. However, replacing a significant part of it to extend its useful life may be considered for capitalization. Any business owner would know that operating a business has other expenses other than the cost of sales.

Contra Liability a/c is not used as frequently as contra asset accounts. It is not classified as a liability since it does not represent a future obligation.

• The periodic system provides better control over inventories than a perpetual system.
• While not always necessary for a business, training and development can help in producing competent employees, which in turn help in improving the business.
• For example, a bond with a principal amount of $1,000 may be sold for only $950.
• 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.
• Mark to market is a method of measuring the fair value of accounts that can fluctuate over time, such as assets and liabilities.
• The allowance for doubtful accounts is not specifically reported, but the 10 reported that the allowance is immaterial to the amount.
• Home Depot also devotes footnote 4 to its share repurchase program and reports that the company is authorized by its board to repurchase $20 billion in shares.

The balance sheet is one of the three fundamental financial statements. The financial statements are key to both financial modeling and accounting. An owner’s equity is arrived at by evaluating the value of a company or individual’s assets minus any liabilities that must be paid. Learn more about the definition of owner’s equity, and practice using the formula for calculating it through examples of real-world scenarios and balance sheets.

Expenses are the expenditure of the company done to acquire an asset or a service. It results in the outflow of money and has a debit balance on the books of accounting. For example, rent expense, salaries expense, depreciation expense, etc. Contra expense accounts are rarely used, because organizations find it to be easier to record third-party payments directly against an expense account. However, these accounts are still useful when dealing with large quantities of reimbursements, where it is cleaner and less confusing to store the information in a separate account. Thus, the use of a separate contra expense account makes it easier to monitor the flow of expenses and reimbursements.

• 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.
• The benefit of using the contra expense account is that the company’s managers can see in account 4210 the total amount that the company paid to the health insurance company.
• The use of a contra account allows Certified Public Accountant a company to report the original amount and also report a reduction so that the net amount will also be reported.
• This balance is used to offset the value of the asset being depreciated, so as of September 1, your $8,000 asset now has a book value of $7,866.67.
• Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company.

Transactions made to contra accounts are presented on a company’s financial statements under the related account. Contra accounts are important because they allow a company to follow the matching principle by recording an expense initially in the contra asset account. The contra asset account is later reduced when the expense is recorded.