Contra Account Definition, Types, and Example

Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. These contras reduce the equity account and carry a debit balance. Contra equity reduces the total number of outstanding as a dependent 2020 shares on the balance sheet.

In this scenario, a write-down is recorded to the reserve for obsolete inventory. These accounts can be listed based on the respective asset, liability, or equity account to reduce their original balance. They are crucial for compliance with generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). They ensure that financial statements adhere to standardized accounting practices, enhancing the credibility and comparability of financial reports. The difference between an asset’s account balance and the contra account balance is known as the book value. 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.

Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. This type of account could be called the allowance for doubtful accounts or a bad debt reserve. 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. The net of these two figures is typically reported on a third line. 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.

This account is not classified as an asset since it does not represent a long-term value. It is not classified as a liability since it does not constitute a future obligation. A contra account is an essential concept in financial accounting that serves to offset the balance of another account. It plays a vital role in maintaining the accuracy and transparency of a company’s financial statements. Contra accounts are used to record adjustments, reversals, or above the line below the line financial concept reductions in the value of assets or liabilities. This means that entries recorded on the left side of the T-account will increase the asset balance and entries recorded on the right side will decrease it.

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. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. 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.

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. The same is true for other asset accounts like accounts receivable. Accounts receivable is rarely reported on the balance sheet at its net amount. Instead, it is reported at its full amount with an allowance for bad debts listed below it.

1. For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets.
2. This depreciation is saved in a contra asset account called accumulated depreciation.
3. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value.
4. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances.
5. 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.

There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra liabilities reduce liability accounts and carry a debit balance. Contra equity accounts carry a debit balance and reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance.

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The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock. Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. In bookkeeping, a contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit (negative) balance. The account offsets the balance in the respective asset account that it is paired with on the balance sheet. Contra account accounting plays a crucial role in financial accounting by offsetting the balance of another account. It is used to track and report adjustments, reversals, or reductions in the value of assets or liabilities.

What Are the Different Types of Contra Accounts?

Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset. Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. Equity recorded as a debit balance is used to decrease the balance of a standard equity account.

Contra Liability Account: What it is, How it Works, Example

The contra revenue account is a reduction from gross revenue, which results in net revenue. These transactions are reported in one or more contra revenue accounts, which usually have a debit balance and reduce the total amount of the company’s net revenue. An asset that is recorded as a credit balance is used to decrease the balance of an asset.

Contra Equity Account – A contra equity account has a debit balance and decreases a standard equity account. Treasure stock is a good example as it carries a debit balance and decreases the overall stockholders’ equity. Companies that issue bonds are likely to use contra liability accounts.

Contra accounts provide a transparent and accurate representation of a company’s financial position, ensuring that financial statements reflect the true financial health of the business. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount. Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset.

What Are Examples of a Contra Asset Account?

Contra asset accounts include allowance for doubtful accounts and the accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. A key example of contra liabilities includes discounts on notes or bonds payable.

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more.

Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. The points below explain the importance of passing a contra account entry. From studying the basics of debit and credit, balance sheet accounts have a healthy balance. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.