Contra Accounts: Explained, Popular Types and Examples

Whenever the balance of an account needs to be reduced in a company’s ledger, it is not always applicable to credit the account if it is an asset or debit the account if it is a liability. As evident from the table below, each contra account has a parent account whose normal balance is often exactly opposite of the normal balance of the relevant contra account. For example, a company has total fixed assets worth of $50,000 for the year ended 2019. Accumulated amortization is an account similar to accumulated depreciation. This account only relates to a company’s intangible assets rather than tangible.

What Are the Different Types of Contra Accounts?

• Accounts Receivable is an asset account that represents the amount of money due to a business for goods or services that have been delivered or used but not yet paid for by customers.
• For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
• The accounting entries for a discount on notes receivables are as follows.
• For example, a company made sales of $60,000 but goods worth of $2,000 were returned due to damage.
• The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.

A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. All of this information is reported on the balance sheet so that it is easier for the readers to understand the financial position of the company. Since we are unsure of exactly which customer would default his payment, we can’t directly credit the accounts receivable account or the accounts receivable subsidiary ledger. A contra account is a ledger account related to another specificledger account. In fact, as the name “contra” suggests, it is the opposite of aspecific class of account.

Types of Contra Assets

For example, a company has an accounts receivable balance of $30,000 for the year ended 31st December 2019. Any company that owns intangible assets such as software, patents, etc., will maintain an accumulated amortization account. Similar to depreciation, this account plays a significant role in representing the book value of a company’s assets. Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers. The amount is not reported, and the net sales amount is reported on the income statement.

Why are contra asset accounts important for businesses?

The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. The amount is reported on the balance sheet in the asset section immediately below accounts receivable. Note that the contra liability account has a positive balance (a debit balance), and the liability account normally has a credit balance. Hence, the book value of the liability will be the credit balance of the liability account minus the debit balance of its contra liability counterpart. Contra liability accounts are special accounts in the liabilities section of the balance sheet.

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• Typically, these notes reflect purchases made on credit by your customers.
• If every single buyer had taken advantage of the early payment discount, the company would have provided roughly $10 thousand in discounts during that same timeframe.
• The amount is not reported, and the net sales amount is reported on the income statement.
• Asset accounts always maintain a debit balance, so anytime that you increase the value of an asset, such as when you deposit customer payments or invoice a customer, that asset account is debited or increased.
• Accumulated depreciation is the most prevalent type of contra-asset account.

The concepts of debits and credits in accounting dictate how transactions are recorded. For instance, to increase asset and expense accounts, we simply record a debit and to decrease those accounts, we can record contra account a credit. 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.

Time Value of Money

Treasure stock is a good example as it carries a debit balance and decreases the overall stockholders’ equity. A contra account is an account with a balance opposite the normal accounts in its category. Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts. In other words, contra accounts are used to reduce normal accounts on the balance sheet. In the above example, the debit to the contra liability account of $100 lets the company recognize that the bond was sold at a discount.

It carries a credit balance and is linked to the fixed asset account, which carries a debit balance. The accumulated depreciation account is designed to reduce the carrying value of the fixed asset account when depreciation is recorded at the end of each period. Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value. For example, GAAP accounting (or generally accepted accounting principles) requires fixed assets to be reported at cost on the balance sheet, but, over time, that value depreciates as the assets are used. The balance sheet will show a gross fixed assets value, a contra account value for accumulated depreciation, and a net value.