Contra Account: A Complete Guide + Examples
These plug-and-play resources—available with paid memberships—can be a game-changer for both seasoned accountants and those new to the field, ensuring accuracy and compliance with every financial statement you draft. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. 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 contra expense account examples 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. A contra account is an account with a balance opposite the normal accounts in its category.
What Is the Benefit of Using a Contra Account?
Treasure stock is a good example as it carries a debit balance and decreases the overall stockholders’ equity. And it requires to record for both companies to ensure the remaining balance is reconciled between the two parties. Contra entry also refers to the offset between accounts receivable and accounts payable of two separate company. It happens when the company has accounts receivable and accounts payable with another company.
What’s the Significance of a Contra Account in Business?
Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account. The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold. The company may have multiple bank account so they will set up multiple chart account for each bank. The transfer of cash from one account to another is also considered as a contra entry.
How are Contra Accounts Used and Reported?
By subtracting these amounts from the total sales, what you’re left with is net revenue— the revenue that’s truly earned and likely to stay in the company’s pocket. Maintaining contra revenue accounts empowers you to maintain healthier and more realistic expectations of financial outcomes—no rose-tinted glasses here. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation.
- The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation.
- The account offsets the balance in the respective asset account that it is paired with on the balance sheet.
- Accumulated Depreciation is a contra asset account with a credit balance that reduces the normal debit balance of Property, Plant and Equipment fixed assets in order to present the net value of long-term capital assets on a company’s balance sheet.
- It is the transaction between cash, petty cash, bank, and other accounts under cash.
A Closer Look at Contra Revenue and Equity
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This presentation separates them from positive asset balances for clear visibility of the adjustments. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. 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. Contra Equity Account – A contra equity account has a debit balance and decreases a standard equity account.
The contra asset account Accumulated Depreciation is deducted from the related Capital Assets to present the net balance on the parent account in a company’s balance sheet. 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. Contra expense accounts have a natural credit balance, as opposed to the natural debit balance of a typical expense account. Therefore, a contra expense account that contains a debit balance must have a negative ending balance.
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees.
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