What is Contra Account and its Importance

We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R). A contra account is also known as a valuation allowance, because it adjusts the carrying value of the account with which it is paired. In terms of the journal entries, the debit balance in “Discount on Bonds Payable” is subtracted from the credit balance in the “Bonds Payable”. The first contra liability listed is an original issue discount (OID), a feature of debt financing wherein the issuance price is less than the redemption price. An item on one side of an account which offsets fully or in part on the opposite side of the same account is technically referred to as contra account.

  • A contra asset account is an account in the balance sheet that offsets the balance of a regular asset account.
  • Contra liability accounts are not as popular as contra asset accounts.
  • In terms of the journal entries, the debit balance in “Discount on Bonds Payable” is subtracted from the credit balance in the “Bonds Payable”.
  • Overall, while maintaining contra accounts may require additional effort, the benefits they offer in terms of financial transparency and accountability make them an essential tool in accounting.
  • The granter may offer the company a discount if it repays the note early.

Accumulated depreciation reflects the reduction in value of a fixed asset. With contra equity accounts, you reduce the number of outstanding shares you list on your company’s balance sheet. Treasury stock and owner’s drawing account are examples of contra equity accounts. Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset.

Contra Revenue Account

Given that liabilities have a credit balance, ensure that all your contra liabilities accounts have debit balances. Discount on notes payable and discount on bonds are examples of contra liability accounts. Contra asset accounts include allowance for doubtful accounts and the accumulated depreciation. These items decrease the liability balance on the paired liability account.

  • This is done to entice customers to keep products instead of returning them.
  • Contra equity accounts carry a debit balance and reduce equity accounts.
  • When the amount recorded in the contra revenue accounts is subtracted from the amount of gross revenue, it equals the net revenue of a company.

A contra liability account is paired with another liability account, and is used to reduce the balance in that account. In essence, the paired liability account contains a credit balance that signifies the presence of an obligation, while the contra account reduces the amount of that liability with a debit balance. A contra account may also have a zero balance, if no offset against a related liability account is currently needed. In finance, a contra liability account is one that is debited for the explicit purpose of offsetting a credit to another liability account. In other words, the contra liability account is used to adjust the book value of an asset or liability. 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.

You may want to first classify contra accounts as contra asset accounts, contra liability accounts, contra equity accounts, or contra revenue accounts before accounting for any transaction. 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. A key example of contra liabilities includes discounts on notes or bonds payable. Contra liability accounts are not as popular as contra asset accounts. There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue.

List of Contra Accounts

For example, assets usually constitute a debit balance on the balance sheet. A contra asset account includes a credit balance that reduces the amount reported for those assets. However, this account does not appear on its own on the balance sheet. Contra liability accounts are less commonly used than contra asset accounts.

Terms Similar to Contra Liability Account

For example, a grocery store displays advertisements for a national brand in its weekly flyer. The national brand gives the grocery store cash, reducing the overall cost of printing the flyer. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. For example, if you bought a car for $10,000 seven years ago and you estimated a seven-year life on the vehicle. Now, the car is worth less than $1,000 and you continue to put more money into upkeep, maintenance, and insurance for the car than the value of the vehicle. Osman Ahmed is a member of WSO Editorial Board which helps ensure the accuracy of content across top articles on Wall Street Oasis.

Simply hit Control + N under the Chart of Accounts or Edit, then click New (to create a new account). Examples of a contra revenue accounts include sales returns, sales discounts, and sales allowances. You debit the contra revenue accounts and credit the corresponding revenue accounts. For example, when you debit the balance in understanding taxes module 2: wage and tip income sales returns account, make sure that you offset the sales revenue account with a credit balance. Contra equity accounts are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds. Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances.

The debit balances in the above accounts are amortized or allocated to an expense, such as Interest Expense over the life of the bonds or notes payable. Similarly, for the remaining 9 years, the depreciation is accounted in contra account and in the 10th year, the net value of machinery will be ‘0’ since it is completely written off. The following will be the journal entry to be recorded in the books of accounts to write-off the asset. 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 accounts is the amount you don’t expect to collect, and this offsets the amount you report in accounts receivable.

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. Contra accounts reduce the balance on a paired account in a specific area in the balance sheet. However, these accounts do not appear on the financial statement separately. Contra accounts relate to all areas in the balance sheet, including assets, liabilities, and equity.

Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. Financing fees refer to the payments issued to the 3rd parties engaged when arranging debt financing, i.e. the administrative costs charged by the lender, lender legal fees, etc. Suppose a bond is issued at a discounted price – i.e. lower than the redemption price (or the stated “par value”). Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

How are Contra Accounts Used and Reported?

For example, treasury stock is a common type of contra equity account. A contra account reduces the reported balance for the paired account. Therefore, this account is the opposite of the amount reported in the original account.

For example, a discount on bonds is a type of contra liability account. This account reduces the balance reported for bonds on the balance sheet. There are also a small number of contra liability accounts that are paired with and offset regular liability accounts. One of the few examples of a contra liability account is the discount on bonds payable (or notes payable) account.

Examples include accumulated depreciation, sales returns and allowances, and contra equity accounts like treasury stock. 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. 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. A contra account always offsets the balance of a corresponding account.

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. A contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as contra asset accounts.

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