What is a Contra Account?

As mentioned, there can be a contra account for any type of transaction depending on a company’s needs. Other than the above contra-asset accounts, we often see contra-revenue accounts for any sales returns or sales rebates. Revenue is an income statement account, but it flows through to the equity section of retained earnings as well.

Allowance for Bad Debt: A Deep Dive to Understand Bad Debt

The debit balances in the above accounts are amortized or allocated to an expense, such as Interest Expense over the life of the bonds or notes payable. The amount in the accumulated depreciation account is deducted from the assets of a company, such as buildings, vehicles and equipment. This can help anyone viewing the financial information to find the historical cost of the asset. 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.

Contra assets

Taking the example of CCC again, the company has $50,000 in accounts receivable at year-end of December 31. CCC estimates that 5% of accounts receivable will most likely be unrecoverable. When the company pays the cost of having the flyer printed, a journal entry is done. The purpose of the Sales Returns account is to track the reduction in the value of the revenue while preserving the original amount of sales revenue.

Why should one include contra accounts on a balance sheet?

Contra accounts such as these have a debit balance and are deducted from the total amount of a company’s revenue. Examples of revenue contra accounts are Sales Discounts, Returns and Allowances. Contra liability accounts such as discount on bonds payable and discount on notes payable usually carry debit balances. This depreciation is saved in a contra asset account called accumulated depreciation. The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment. There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue.

• If the balance in your allowance for doubtful accounts has a credit of $1,000 and your accounts receivable has $20,000 in normal debit balance, then the net value of the receivables is $19,000.
• By providing a more accurate depiction of net expenses, these accounts enable analysts to delve deeper into the efficiency of a company’s operations.
• The two most common contra accounts are the allowance for doubtful accounts/bad debt reserve, which is subtracted from accounts receivable, and accumulated depreciation, which is subtracted from fixed assets.
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• Companies like to depreciate assets as quickly as possible to get the tax savings, so the balance sheet may not state the true value of fixed assets.
• Furthermore, contra expense accounts enhance the reliability of financial ratios used in analysis.

If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming. Understanding how contra expense accounts function is vital for anyone involved in financial management or analysis. They not only help in maintaining transparency but also ensure that financial statements reflect true operational efficiency.

• There are various technical definitions of what constitutes a bad debt, depending on accounting conventions, regulatory treatment and the institution provisioning.
• So an Accumulated Depletion account would serve as the contra for the parent Fixed Asset account.
• A contra account provides missing context by pairing it with a related account.
• It is not classified as a liability since it does not represent a future obligation.
• Taking the example of CCC again, the company has $50,000 in accounts receivable at year-end of December 31.

Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount. For this reason, contra accounts are primarily seen as having negative balances because they are contra expense account used to reduce the balance of another account. At Invoiced, we provide a suite of solutions that work together to make managing your invoicing, accounts receivable, and accounts payable seamless and easy.

List of common contra accounts

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. Another description of a contra expense account is an account that reduces or offsets the amounts reported in another general ledger expense account(s). There is almost always a story behind data; a clarification or historical insight that changes the meaning behind raw figures. In a report, layering on that additional context can be easy, but in a general ledger, you have few options for conveying nuance and subtlety.

Example of a Contra Expense Account