Contra accounts definition

Contra accounts definition

What Is a Contra Account and Why Is It Important?

Contra liabilities reduce liability accounts and carry a debit balance. Contra equity accounts carry a debit balance reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance. Just like contra asset accounts offset the positive values of assets on the balance sheet, contra liabilities offset the negative value of liabilities on the balance sheet.

  • Apple breaks out its amount of property, plant, and equipment (PP&E) and then lists its accumulated deprecation that reduces the PP&E figure.
  • All three values can be useful for investors depending on what they’re looking for.
  • Contra account is the opposite account, related to the main account.
  • The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment.
  • Outstanding SharesOutstanding shares are the stocks available with the company’s shareholders at a given point of time after excluding the shares that the entity had repurchased.
  • Normal discounts usually consist of a marketing strategy, when a customer purchases a large volume of product, or if a customer wants to make early payments on the product.

Sometimes, it is important to keep the original balance of the accounts and create the contra accounts to be able to calculate the net value of the account. 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. In an accounting system, ledger accounts are designed to contain similar classes of transactions. But for presentation purposes it is sometimes necessary to show net balance of two accounts. A contra account is an account that is used to offset another account. The balance in the contra account is reduced when the corresponding asset or liability it is paired with is disposed of.

Contra equity

When recording assets, the difference between the asset’s account balance and the contra account balance is the book value of the asset. The balance in the allowance for doubtful accounts is used to find out the dollar value of the current accounts receivable balance that is deemed uncollectible. The balance sheet shows the amount in the asset section underneath the accounts receivable.

When one institution borrows from another for a period of time, the ledger of the borrowing institution categorises the argument under liability accounts. Overall, “assets” is the broad term for all resources controlled by a company, from cash to patents. Given the potential diversity of a company’s assets, asset classifications can become confusing for people who don’t deal with them often. Among the several subsets under the assets umbrella there are current assets and fixed assets as well as tangible/intangible. Fixed assets are held for more than a year because they have longer useful lives and are not expected to be converted to cash sooner. Examples include vehicles, manufacturing equipment, furniture and buildings.

Reserve for Obsolete Inventory

A customer returned $100 worth of items, claiming them to be defective. In the books, the account of the asset would have a debit value of $100,000, and the CA account would have a credit value of $30,000. If the asset account had a credit balance or the CA account had a debit balance, this would indicate an error in the journal entries.

What are the different types of contra accounts?

“There are 4 main types of contra accounts: – Contra Asset Account – Contra Liability Account – Contra Equity Account – Contra Revenue Account”

It offsets the balance of the related account, which means when the corresponding account is positive, a contra account will be negative. The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet.

What is Contra Account in Accounting

Debit balances are normal for asset and expense accounts, and credit balances are normal for liability, equity and revenue accounts. When a particular account has a normal balance, it is reported as a positive number, while a negative balance indicates an abnormal situation, as when a bank account is overdrawn. However, land does not depreciate and does not affect the income statement, statement of cash flows or tax returns in the same way as other fixed assets. Land does not qualify for depreciation because it does not decline in value from use, exhaustion and obsolescence in the same way a piece of machinery might.

What Is a Contra Account and Why Is It Important?

Asset accounts usually have a positive value which is the same as a debit balance. Treasury stock is a contra equity account that is entered as a negative value on the balance sheet of public companies. It shows the amount of funds used to repurchase previous issuances of stock, reducing the total number of shares outstanding. Original issue discounts are a type of contra liability like financing fees because they are also amortized over What Is a Contra Account and Why Is It Important? a loan’s term and reduce pre-tax income. The purpose of recording OID as a contra account is to quickly show the difference between the redemption price and the discounted offering price of debt. Note that the Balance Sheet is not affected with the result of the above entry as the cash flow is between two asset accounts. As an example, if the value of machinery is $500,000 at the end of the year, this is the net value of the machinery.

What are the Five Types of Contra Accounts?

Located in Mission Viejo, CA, we provide professional bookkeeping services to all of the great cities in Orange County and beyond. (Or so we’ve been told.) Reach out to us today for all of your bookkeeping and business consulting needs. Mariel Loveland is a small business owner, content strategist and writer from New Jersey. Throughout her career, she’s worked with numerous startups creating content to help small business owners bridge the gap between technology and sales. Her work has been featured in publications like Business Insider and Vice. Discount allowed and received accounts for Sales or Purchases respectively.

How are contra accounts used?

Contra accounts are used to help a company report the original amount of a transaction as well as reductions that may have happened. This allows the net amount to also be reported. They serve an invaluable function in financial reporting that enhances transparency in accounting books.

The first known recorded use of the terms is Venetian Luca Pacioli’s 1494 work, Summa de Arithmetica, Geometria, Proportioni et Proportionalita . Now that I have thoroughly dated myself, let’s get into contra accounts. By the same token, an account with a credit would be balanced by a contra-asset account.

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