Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable. They are used in case some customers won’t be able to pay the money they owe to the business. The two most common contra revenue account contra accounts on a balance are accumulated depreciation and the allowance for doubtful debts. Accumulated depreciation tallies the depreciation to date of a fixed asset, such as a car or a building.

What Is A Contra Asset Account?

The main advantage of using separate contra revenue accounts is that each one provides targeted information about the individual deductions taken from sales. Since each of these deductions directly reduces your profits, it makes sense to research them in detail, to see if there are any actions that can be taken to reduce the number of deductions. For example, this analysis might indicate that your business has product quality problems or servicing issues that can be corrected. In addition, you can examine the impact of sales discounts on increases in sales, to see if it makes sense to continue offering discounts in order to boost profits. The contra asset account Accumulated Depreciation is deducted from the related Capital Assets to present the net balance on the parent account in a company’s balance sheet. The list of asset accounts on your general ledger and balance sheet conveys the combined, potential value of all of the tangible and intangible items that your organization possesses.

• An example of contra equity with buying back shares or stock would be a company that has issued shares to the public.
• The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation.
• The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline.
• And by comparing these contras against their corresponding parent accounts, you can better understand the actual value of the assets retained by your business.
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• The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.

Contra equity

Contra assets give investors a better picture of how you use your assets over time. If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative. On the other hand, if you’re looking at a high-flying growth stock that reports new revenue growth records each quarter but has a massive allowance for doubtful accounts, there may be problems ahead. A contra account is a general ledger account with a balance that is opposite of the normal balance for that account classification. The use of a contra account allows a company to report the original amount and also report a reduction so that the net amount will also be reported.

Do Contra Accounts Have Debit or Credit Balances?

The company predicts which accounts receivable won’t be paid by customers and writes those off. 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. If the bond is sold at a discount, the company will record the cash received from the bond sale as “cash”, and will offset the discount in the contra liability account. Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance. 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.

How to Record a Contra Account

If you’re the one managing your company’s books of accounts, be sure to report the contra account on your financial statement on the line item directly beneath the main account. A normal asset has a debit balance, while a contra asset sits against this to show the net balance of both assets on your financial statement. Are you looking for a way to account for accumulated depreciation, returned merchandise, or damaged inventory?

What is a Contra Account?

• It can help companies see the complete picture of their income and expenses and their equity or net worth.
• Contra accounts play an important role in accounting by helping businesses track certain aspects of their finances more accurately.
• Home Depot also devotes footnote 4 to its share repurchase program and reports that the company is authorized by its board to repurchase $20 billion in shares.
• Contra accounts act like regular accounts on the balance sheet but have a unique purpose.
• There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue.

The accumulated depreciation amount shows how much depreciation expense has been charged against an asset. Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value. The use of contra accounts ensures the accuracy of financial accounting records, as the value of the original accounts is not directly reduced. In the event that a contra account is not utilized, it can become increasingly troublesome to determine historical costs, which makes tax preparation time-consuming and difficult. Including contra revenue accounts is important in the income statement because it shows the original amount of sales the firm has made, along with any factor that has reduced that amount. Contra liability accounts are special accounts in the liabilities section of the balance sheet.

What are examples of contra accounts?

Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock. The main reason is to make the remaining shares more valuable, as their prices are expected to rise after the stock buyback. The auditors aim to keep the balances at their adequate levels, but the controller might want to keep them as low as possible to reduce expenses and maximize profit levels. Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values.

• Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance.
• The difference between an asset’s account balance and the contra account balance is known as the book value.
• He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.
• Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.

Contra Account Examples