Contra Account: A Complete Guide + Examples

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. Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement. Contra accounts allow you to show the amounts that offset a paired related account.

Contra Account Definition, Types, and Example

• When a contra asset account is first recorded in a journal entry, the offset is to an expense.
• Both the asset and the corresponding contra asset accounts must be stated clearly in the balance sheet.
• Asset accounts usually have a positive value which is the same as a debit balance.
• Contra accounts act like regular accounts on the balance sheet but have a unique purpose.

The exact process can vary depending on the specific contra account and the accounting practices of the company. However, the fundamental principle is that the contra account is used to offset the related main account, providing a more nuanced view of the company’s financial position. An important function of contra accounts is to preserve the historical value in the main account while presenting a reduction in the net value. By recording the offset in a separate contra account, accountants can see how much of the value in the main account has been offset. For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance.

• However, the fundamental principle is that the contra account is used to offset the related main account, providing a more nuanced view of the company’s financial position.
• Instead, you need to record this value gap, and a contra asset account serves that purpose.
• You may use accounting software packages, such as QuickBooks Online to set up contra accounts.
• Contra asset accounts include allowance for doubtful accounts and the accumulated depreciation.
• In this way, the historical cost, the amount of write-off, and the book value of an asset can always be seen on the balance sheet.
• A key example of contra liabilities includes discounts on notes or bonds payable.

Contra Account: Definition, Types & Examples

As your business acquires new assets (e.g., machinery, office equipment, vehicles), you record the initial purchase value in your Fixed Asset account. But these items don’t retain that initial value; if liquidated, they would likely be sold at a loss. In order to record this ongoing value drop, you would use a corresponding contra account — an Asset Depreciation account. Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock.

Example #1: Revenue Contra Account

Contra accounts are an essential component of the accounting process, designed to reflect the true value of assets, liabilities, equity, or revenue of a business. They provide a more nuanced picture of a company’s finances, allowing stakeholders to make informed decisions based what is a contra account on realistic, transparent financial information. Accumulated depreciation is the total of all depreciation that has been charged to existing fixed assets such as equipment and buildings. There can be hidden value in stocks that have a lot of fully depreciated buildings.

The difference between an asset’s account balance and the contra account balance is known as the book value. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. For example, a company has total fixed assets worth of $50,000 for the year ended 2019. There is the existence of contra accounts in accounting which are accounts that have the purpose of decreasing the value of another specific account if the two accounts are netted or summed together. Contra accounts help maintain the accuracy of financial records, provide transparency in reporting, and allow for proper tracking and analysis of specific transactions or events. Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers.

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.

• Conversely, for a contra asset account like depreciation, you would list all entries as a credit, carrying a negative total balance for the overall account.
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• Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares.
• It is a contra asset account and is directly related to the accounts receivable (asset).
• This indicates that out of $100,000 sales, your customers return goods valued at $500.
• For instance, if a company has a plant asset such as Equipment with a debit balance of $92,000 and the account Accumulated Depreciation has a credit balance of $50,000, the carrying amount (or book value) of the equipment is $42,000.