What Is a Contra Account? Types + Examples

For instance, the “Accumulated Depreciation” contra account offsets the value of fixed assets like machinery or buildings, reflecting their reduced value over time due to wear and tear. 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.

2. Repurchased Treasury Stock Shares Equity Contra

In other words, contra accounts are used to reduce normal accounts on the balance sheet. A Contra Asset Account is an asset account having a credit balance that is related to one of the assets with a debit balance. When we add the balances of two of these assets together, it reflects the net book value or carrying value of the debit balance assets. For example, if the contra account is related to an asset then it would be referred to as contra asset and reported on the statement of financial position right below the related asset, reducing it to its net realizable value.

List of Accounts

For example, if a company just reported equipment at its net amount, users would not be able to observe the purchase price, the amount of depreciation attributed to that equipment, and the remaining useful life. Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset. However, the “Allowance for Doubtful Accounts” (or “Allowance for Uncollectible Accounts”) is a contra account related to the concept of bad debts. This contra-asset account reduces the accounts receivable balance on the balance sheet to its net realizable value.

However, an accountant or person in charge must ensure that any change in the value of the assets due to revaluation or impairment must be considered. Also, with IFRS (International Financial Reporting Standards) asking to report it in a particular way, the accountants must be updated with recent changes to how the contra assets account should appear in the books of accounts. Managing contra-liability accounts helps you keep your financial records accurate.

What is a Contra Asset Account?

• Investors and stakeholders rely on accurate data to assess a company’s true value and financial stability.
• A business might elect to separately state contra asset accounts on its balance sheet, so that the users of its financial statements can obtain additional information about the contents of these accounts.
• These include accumulated depreciation, accumulated amortization, allowance for receivables, obsolete inventory, and discount on notes receivables.
• Contra asset accounts are an integral part of understanding and managing a company’s overall financial health, but they can seem counter-intuitive and difficult to grasp if you don’t have a strong background in accounting.
• These accounts can be listed based on the respective asset, liability, or equity account to reduce their original balance.
• A contra revenue account reduces your total revenue on financial statements.

Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a creditbalance. 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. 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. Whenever an organization buys an asset and depreciates it over the asset’s useful economic life, the reduction in value accumulates over the year, which is called accumulated depreciation. The accumulated depreciation balance cannot exceed the book value of the asset. We get the remaining value of assets by deducting the accumulated depreciation balances from the book value of the asset.

Is a Contra Account a Debit or Credit?

A contra account is a financial account that offsets the balance of a related account. It helps reduce the reported value of assets, liabilities, or revenue on financial statements. Instead of changing the main account directly, you use a contra account to keep records clear and accurate. These accounts appear in the balance sheet or income statement and ensure transparency in financial reporting. By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company.

It’s often paired with fixed assets like vehicles, buildings, and equipment. This type of reporting allows anyone analyzing the balance sheet to understand much more about the company and its assets than if they were to simply look at the net value of the depreciated asset. By reflecting both accounts on the balance sheet, analysts can understand both the original price and the total decrease in value of a certain asset over time. A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete. Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods.

With the appropriate level of automation integration in your chosen tool, you can pull the relevant values into these individual accounts directly from invoices, credit agreements, and other documentation. Notes receivables are promissory notes that include a promise from a borrower to repay a lender. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. Whether reported as separate lines on the financial report or as a cumulative value, the net amount of the pair of accounts is called the “net book value” of the individual asset.

If you don’t track these adjustments, your liabilities may look higher than they actually are. Accountants and financial teams handle these accounts to ensure compliance. At Invoiced, we provide a suite of solutions that work together to make managing your invoicing, accounts receivable, and accounts payable seamless and easy. To convert your invoice management efforts to an electronic format that can easily share data with other financial systems, businesses can leverage Invoiced’s E-invoice Network.

1. Sales Discounts, Returns and Allowances Revenue Contra

• The balance sheet would show the piece of equipment at its historical cost, then subtract the accumulated depreciation to reflect the accurate value of the asset.
• Contra asset accounts might seem a little intimidating at first, but they’re really just tools to make financial statements more accurate and reliable.
• The revenue contra accounts Sales Returns, Discounts and Allowances are subtracted from the main Sales Revenue account to present the net balance on a company’s income statement.
• A contra asset account is not classified as an asset, since it does not represent long-term value, nor is it classified as a liability, since it does not represent a future obligation.
• For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets.

There are several examples of contra accounts, including accumulated depreciation, accumulated depletion, accumulated amortization, allowance for receivables, etc. These are all examples of contra-asset accounts, which are the prevalent type of contra accounts. In simple terms, a contra asset account is an account that reduces the value of an asset account on the balance sheet. While asset accounts usually have a debit balance (increasing when you add to them), contra asset accounts have a credit balance.

These balances cannot offset asset accounts that do not relate to them. Contra accounts are a significant part of a company’s financial statements. These accounts can significantly reduce balances on the balance sheet.

The hottest retail item of today can be relegated to nostalgia channels on YouTube tomorrow. And when your business still has some of these outdated, unwanted, or unusable items in your inventory, you’ll want to offset the lost value of these assets in your general ledger and balance sheet. So rather than adjusting your Inventory account, you would update its contra account — Obsolete Inventory.

By viewing these accounts — the parent and contra — in tandem, business owners can gain broader insights, preserve the historical figures stored in the parent account, and make accommodations for any relevant changes. On the other hand, accumulated depreciation is a contra-asset account. This account offsets the balance in the respective asset account that they pair with on the balance sheet. For example, if an account has a debit balance, a contra account will have a credit balance.

Specifically, it is contra to shareholders’ equity because it decreases the total shareholders’ equity on the balance sheet. Sometimes, the current value of a note receivable will fall compared to its face value. This process will give rise to a contra asset account contra asset account which is the discount on notes receivables. Similarly, allowance for receivables will pair with accounts receivable balances.