What Is a Contra Account? The Motley Fool

These assets will have a useful life of more than one year and will be recorded as non-current assets on the balance sheet. Examples of fixed assets include land, building, equipment and vehicles. Revenue accounts have a credit balance. To oppose the revenue made by a company, contra revenue accounts must have a debit balance.

Accumulated deprecation represents the cumulative amount of depreciation expense charged against an asset. Accumulated deprecation reduces the value of an asset. There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue.

Presentation of Contra Assets

There are many situations where one account is used to offset another account. One common example is accumulated amortisation, which is a contra-asset account. This means that it acts in the opposite manner of a regular asset account. Contra revenue account, which is used to record the net amounts and usually has a debit balance, as opposed to the revenue account that records the gross amounts.

Robert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive. He is a professor of economics and has raised more than $4.5 billion in investment capital. Nora O’Malley covers small business finance and entrepreneurship topics for The Balance. For her businesses, Nora is responsible for finances, marketing, operations, and fundraising. Along with The Balance, her writing has appeared in Thrillist, Insidehook and Vinepair. Contains the amount of sales discount given to customers, which is usually a discount given in exchange for early payments by customers.

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Contra equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock. For both contra asset accounts, the entry is a debit to an expense and the credit is to the contra asset account. Fixed assets include company assets that are used in daily operations.

• Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts.
• Therefore, a contra asset account is credited in order to reduce the amount of the asset.
• Explain what accounts are credited when goods are sold on an account.
• Which of the following is not an asset account?
• Contra asset accounts are used to reduce the debit balance of its corresponding asset account in order to calculate a net value for each asset.
• Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year.
• A contra liability account is the lesser known type of a contra account.

They can present more information about the assets and liabilities of the company. Such information includes the purchase cost of an asset , the amount of depreciation written off for that asset, etc. If your expenses occur faster than agreed upon prepayments, you could end up with a situation where a prepaid expense account could start carrying a credit balance. This could happen if, for example, you’re having worker’s comp insurance premiums go up after you’ve already made payment due to a workplace accident.

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The company uses the straight-line depreciation method for the car. Sales discounts are when the company reduces the price of a certain product whenever the customer completes the payment early. Sales returns and allowances are when customers return a product they bought to get a partial or full refund.

A contra equity account reduces the total number of outstanding shares listed on a company’s balance sheet. Treasury stocks represent a contra equity account. When a company buys back its own shares from the open market, it https://www.bookstime.com/ records the transaction by debiting the treasury stock account. A company may decide to buy back its shares when management feels the stock is undervalued or because it desires to pay stock dividends to its shareholders.

Contra Asset Account Example

Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. She previously worked as an accountant. It really depends on what you’re selling. If you stock a limited amount of inventory, you could probably do without it.

This account decreases the value of the liability. 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. A liability that is recorded as a debit balance is used to decrease the balance of a liability. The discount on bonds payable is a contra liability account.

Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset’s net value or book value. The definition can be expanded to include contra accounts in general.

• 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.
• Free Cash Flow The money left over after a company supports operations can be a snapshot of its financial health.
• Key examples of contra accounts include accumulated deprecation and allowance for doubtful accounts.
• Although they all aim at reducing the balance of some type of account, it is useful to have some general foundational knowledge of the different types of accounts.
• These Sources include White Papers, Government Information & Data, Original Reporting and Interviews from Industry Experts.
• You can find contra accounts all over the balance sheet.

The amount of the decline is recorded in the accumulated depletion account. 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. If you offer credit terms to your customers, you probably know that not all of them will pay. That’s where the allowance for doubtful accounts comes in. Creating this contra asset account builds in a safeguard against overstating your accounts receivable balance. The contra equity account treasury stock is reported right on the balance sheet.

What is a Contra Account? Definition

When a company repurchases shares, it increases the fractional ownership of all remaining shareholders. Contra liabilities are common in companies that sell bonds to raise capital. To drum up interest in the bond, the company will sell it at a discount. For example, a bond with a principal amount of $1,000 may be sold for only $950. The bond is listed on the balance sheet at the full amount of $1,000, but the cash received is just $950, so a contra liability for the discount is listed to make the entry balance.

• Another contra asset listed on the balance sheet is accumulated depreciation.
• Often when a company extends goods on credit, management expects some of those customers not to pay and so anticipates writing off bad debt.
• It is a contra-account, the difference between the asset’s purchase price and its carrying value on the balance sheet.
• For example, a company has determined that 5% of their accounts receivable in the amount of $15,000 will become uncollectible.
• Beginner’s Guide to Financial Statements When researching companies, the financial statement is a great place to start.
• View the examples of contra revenue and asset accounts.
• Discount on bonds payable is a result of a bond issued for less than the face value of the bond.