Contra Account: A Complete Guide + Examples

The most common contra equity account is called “treasury stock.” This special account decreases the number of shares outstanding in the market because the company repurchases some of the shares from its buyers. Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks. The most common type of contra account is the contra-asset account. This type is paired with the asset account, which allows a business to record the original price or value of the asset at time of purchase. The contra asset account then allows recording of the value factoring in depreciation.

You don’t have to, yet even a small business will benefit by using the https://www.bookstime.com/ for accounts receivable. This eliminates the need to write off large accounts receivable balances at year end since they’ve already been accounted for. If you offer credit terms to your customers, you probably know that not all of them will pay.

Overview: What is a contra asset account?

Therefore, the book value of an asset in the books is equal to its historical cost minus the related amount of contra asset in the balance sheet . The direct write-off method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible. The allowance for doubtful accounts is a contra asset with a normal credit balance. Contra account is important as it not only allows a company to report the original amount of a transaction but also report any reductions that may have happened so that the net amount will also be reported. 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.

Examples of revenue contra accounts are Sales Discounts, Returns and Allowances. The natural balance in a contra asset account is a credit balance, as opposed to the natural debit balance in all other asset accounts. There is no reason for there to ever be a debit balance in a contra asset account; thus, a debit balance probably indicates an incorrect accounting entry.

Is a Contra Account a Debit or Credit?

An allowance for doubtful accounts is a contra-asset account that reduces the total receivables reported to reflect only the amounts expected to be paid. A contra liability account is a liability account that is debited in order to offset a credit to another liability account. When accounting for assets, contra asset account the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. This type of account could be called the allowance for doubtful accounts or bad debt reserve.

Only customer accounts with balances are reported on the schedule of accounts receivable. Income statement accounts are temporary accounts, while balance sheet accounts are permanent accounts. Bad Debts expense is increased and Accounts Receivable is decreased at the end of the period to recognize bad debts under the allowance method.

Obsolete Inventory

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.

• It is only prudent to show the reduction or reserve in a separate account, and at any point, it gives us the netbook value explaining what the actual cost was and how much of that has been depreciated.
• The purpose of a contra account is to reduce an asset account, such as accumulated depreciation, reducing a building asset account.
• This type of account could be called the allowance for doubtful accounts or bad debt reserve.
• The “Allowance for Doubtful Accounts” account is best described as a contra-liability.
• Discount on notes payable reduces the total amount of the note to reflect the discount offered by the lender.