Contra Account Definition, Types, and Example

This means that the $85,000 balance is overstated compared to its real value. At this point, it isn’t known which accounts will become uncollectible so the Accounts Receivable balance isn’t adjusted. Instead, an adjusting journal entry is done to record the estimated amount of bad debt.

• The offset to the Depreciation Expense account is Accumulated Depreciation.
• It is important to realize that unearned revenue is not a contra revenues account.
• If the company withholds $2,000 from its employees‘ wages to pay part of the cost of the insurance, the company will credit its contra expense account 4211 Employee Withholdings for Health Ins.
• Definition of Contra Asset Account A contra asset account is an asset account where the account balance is a credit balance.
• If the related account is an asset account, then a contra asset account is used to offset it with a credit balance.

Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value. Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount.

An example of recording a contra asset

If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming. 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.

By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company. For example, if a company just reported equipment at its net amount, users would not be able to observe the purchase price, the amount of depreciation attributed to that equipment, and the remaining useful life. Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset. 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.

• Discount on Bonds Payable is a contra liability account with a debit balance that reduces the normal credit balance of its parent Bonds Payable liability account in order to present the net value of payables on a company’s balance sheet.
• Accumulated Depreciation is a contra asset that pairs with Fixed Assets.
• All three values can be useful for investors depending on what they’re looking for.
• Therefore, for these three, the debit balance actually represents a negative amount.
• Then in account 4211 they can see the portion of the cost that was paid by the employees.

In accounting, refunds are handled through a contra-revenue account known as the sales returns and allowances account, reports Accounting Coach. When you issue a refund, you make a refund double entry, which means you must adjust two separate accounts in your records. Contra revenue accounts appear near the top of the income statement, as a deduction from gross revenue. If the amounts of these line items are minimal, they may be aggregated for reporting purposes into a single contra revenue line item.

When the account receivable is written off, it is added to bad debt expense on the income statement and placed in the contra account. If a company has a high or fast-growing allowance as a percentage of accounts receivable, keep a close eye on it. The difference between the gross balance of a main account and its contra accounts reported as the net balance in a company’s financial statements is also referred to as a book value, current value, carrying value, or net realizable value.

The purpose of the Sales Returns account is to track the reduction in the value of the revenue while preserving the original amount of sales revenue. The sales discounts account contains the amount of sales discounts given to customers, which is usually a discount given in exchange for early payments by them. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own.

The following are examples of contra expense accounts used in double entry bookkeeping. Definition of Contra Asset Account A contra asset account is an asset account where the account balance is a credit balance. It is described as „contra“ because having a credit balance in an asset account is contrary to the normal or expected debit balance. A contra account is a general ledger account that offsets the balance of a corresponding account with which it’s paired. If you debit the contra account, ensure that you offset the related account with a credit balance.

Is contra account a liability?

He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. When the two balances are offset against each other they show the net balance of both accounts. In order to pass a contra entry click on “+” and under Other click on Transfer. Enter the amount, Memo and check the date of the transaction and click on Save button. The sales allowances account contains either an allowance for reductions in the price of a product that has minor defects, or the actual amount of the allowance attributable to specific sales. 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.

Contra assets

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Allowance for doubtful accounts (ADA) is a contra asset account used to create an allowance for customers who are not expected to pay the money owed for purchased goods or services. The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables. 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. The accumulated depreciation account is perhaps the most common contra asset account used by business owners. A contra expense is an account in the general ledger that offsets a specific expense account. It is used when a company initially pays for an expense item and is then reimbursed by a third party.

How do I record a contra entry in QuickBooks?

Contra expense accounts can be used to track expenses or income from other accounts in the general ledger. They can be used to create a running total of what is owed or received from third parties and can be used to balance the books. They are also useful for businesses that need to track transactions between multiple accounts. The contra account will be a sub account of the expense account, and I will be manually entering the correcting journal entries. I’ll have to do it this way because the reimbursements were originally mis-catagorized as income, which violates GAAP. QB itself isn’t set up to handle something like this on its own, so manual entries is the only way I know of to take care of it.

The contra liability account is less common than the contra asset account. An example of a contra liability account is the bond discount account, which offsets the bond payable account. A contra liability account is not classified as a liability, since it does not represent a future obligation.

Contra equity

In essence, contra accounts allow you to report your firm’s gross and net amounts. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. While tracking contra asset accounts is cumbersome for bookkeepers and accounting clerks using manual accounting systems, if you’re using accounting software you’ll find that most of the heavy lifting is done for you. Anytime you need to depreciate an asset, you’ll use an accumulated depreciation contra asset account, which records the amount of depreciation that has been expensed while offsetting the value of the asset being depreciated.

Definition of Contra Entry Contra entry refers to transactions involving cash and bank account. In other words, any entry which affects both cash and bank how to calculate net income after taxes accounts is called a contra entry. You’ll continue to use the contra asset account until the equipment has been completely depreciated, retired, or sold.

Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. These contra revenue accounts tend to have a debit balance and are used to calculate net sales. The sales discounts contra revenue account records the discounts given to customers on sales made to them, normally a cash or settlement discount.