Contra Account Definition, Example

contra account definition

Allowances for bad debts under receivables accounts and bad debt accounts are contra accounts to a revenue account. Contra asset accounts are a type of contra account that net off against asset accounts. They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting. For instance, it is common to keep the purchase price of a piece of equipment as a historical cost in the debit asset account when it comes to fixed assets. When a contra asset account is first recorded in a journal entry, the offset is to an expense.

contra account definition

Both of these accounts offset each other to represent a net balance on a company’s balance sheet. For most companies, the contra asset accounts will also include several types. Before understanding contra asset accounts, it is crucial to learn what contra accounts are.

Reference Numbers Organize The Chart Of Accounts

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 which is the discount on notes receivables. However, a contra asset account usually has a credit or nil balance.

These accounts can be listed based on the respective asset, liability, or equity account to reduce their original balance. It is a general ledger account with a purpose to have its balance to be the opposite of the original balance for that account.

Discounts on notes receivable – Transactions shown here are based on the amount of money owed on liabilities like loans. Accumulated depreciation – This is the value of depreciated value shown on an asset over time. Depreciation is the loss of value for something through time and usage. Accumulated depreciation shows a reduced overall value for assets like buildings, machines, and vehicles. Sales Discounts –Sales discounts are offered on sales of goods to attract buyers.

Types Of Contra Assets

Debit depreciation expense for $18,625 and credit accumulated depreciation-equipment for $18,625. Doubtful debts are those debts that a company believes will not be received in the future. This is deducted from the total of receivables to get the net receivables. Besides the official login page, there will be many other pages that will also be provided such as login instructions, or pages providing notes during the login process.

contra account definition

Suppose, for example, that a firm acquires assets valued at $100,000. This impact could occur in “Account 163, Factory manufacturing equipment” from the Chart of accounts below. When you record a fixed asset, you debit the Fixed Assets account for the purchase price and credit the Cash or Loan account.

How Contra Asset Accounts Work

These balances cannot offset asset accounts that do not relate to them. Although contra asset accounts have credit balances, they do not appear in liabilities or equity. Usually, credit balances include items from one of those two natures. Therefore, contra asset accounts differ from other accounts that have a credit balance. This requirement also comes from the accounting standard for inventories.

contra account definition

The entry passed for recording this transfer is known as set off or contra entry. On the Choose Billable Time and Costs window, you can change the Markup Amount or % and the Markup Account used for this transaction. NON-DISCRETIONARY ACCRUAL is a mandatory expense/asset that is recorded within the accounting system that has yet to be realized. Contra revenue account is an opposite account to revenue, which decreased gross revenue balance and the result is called net revenue. For instance, the balance of the equity account is $10,000, and the owner of the business withdraws $900 for personal use. Likewise, drawing means to withdraw money from the business for personal use.

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Similarly, it allows companies to retrieve original account balances without complicated calculations. For stakeholders, looking at both accounts is also crucial in their decision-making process. Regardless of that, allowance for receivables accounts will exist for all companies that have account receivable balances.

  • Debit accumulated depreciation -equipment for $16,875 and credit depreciation expense for $16,875.
  • Accumulated depreciation reduces costs of asset and contra account is used to have cost value and accumulated depreciation separately.
  • It is clear evident in the chart above that contra account is following the rule of going in reverse.
  • Contra asset accounts help companies to record any reductions to their non-current and current assets.
  • Contra asset accounts have a balance that is opposite from the regular asset accounts.

A complete example—even for a small company—would no doubt list many more accounts. He first step in setting up an accounting system with a commercially-available accounting application, is creating the system’s Chart contra account definition of accounts. The application will at the outset suggest account names and reference numbers for the Chart of accounts. It will base suggestions on the size and complexity of the company and the nature of its business.

Example Accumulated Depreciation

Firms that sell to other businesses designate their major repeat customers as accounts. In such cases, the seller may appoint one of its own sales staff as Account Manager, focusing primarily on that account. Account managers in this sense are responsible for sales performance with this customer. And, they are also responsible for building a continuing customer-seller relationship with the account. Current liabilities are listed on the balance sheet under the liabilities section and are paid from the revenue generated from the operating activities of a company. At the end of the month, the smaller amount in his account from one ledger is transferred to his account in the ledger with large amount.

This account is paired with the fixed assets line item on the balance sheet, so that the combined total of the two accounts reveals the remaining book value of the fixed assets. What contra account is used when recording and reporting the effects of depreciation? The Accumulated Depreciation contra asset account is used for depreciation.

Understanding A Contra Account

Because contra means “against,” one could quickly conclude that a contra asset account is going to be an account that goes against the regular asset account on the Balance Sheet. These are both asset accounts and do not increase or decrease a company’s balance sheet.

This account only relates to a company’s intangible assets rather than tangible. Contra assets allow for more granular visibility on the balance sheet by maintaining historical costs and independent values rather than reducing the original account directly. Contra assets are credit accounts that carry their own values that when combined with the value of the paired account, informs the balance sheet.

Upon activating your course, you will have an initial 36 months of access. You can then renew your subscription as many times as you need to pass your exams—for FREE. Simply click the “renew” option in your student account and you can continue studying your high-quality course materials without losing any of your data and course progress. Each of the following accounts is either an Asset , Contra Account , Liability , Shareholders’ Equity , Revenue , Expense or Dividend account.

What Is A Contra Asset Account? Definition, Types, Example, And More

From the cardholder’s point of view, a credit card account normally contains a credit balance, a debit card account normally contains a debit balance. On the other hand, when a utility customer pays a bill or the utility corrects an overcharge, the customer’s account is credited.

Contra Accountmeans an Account due from an account debtor to which the Borrower owes money. Companies that hold inventories for a long time may face accumulating obsolete inventory. Treasury Stock AccountTreasury Stock is a stock repurchased by the issuance Company from its current shareholders that remains non-retired. Contains either an allowance for reductions in the price of a product that has minor defects, or the actual amount of the allowance attributable to specific sales. Free AccessProject Progress ProFinish time-critical projects on time with the power of statistical process control tracking. The Excel-based system makes project control charting easy, even for those with little or no background in statistics.