Unlike an asset which has a normal debit balance, a contra asset has a normal credit balance because it works opposite of the main account. The difference between the gross balance of a main account and its contra accounts reported as the net balance in a company’s financial statements is also referred to as a book value, current value, carrying value, or net realizable value. Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance. Contra equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock. The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable.
How to Present Contra Accounts on Financial Statements
For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. 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. A contra account is an asset account that is kept at either a negative or zero balance and is used on a balance sheet to offset the positive balance of a paired asset. To put it another way, a contra account is an account listed within a general ledger with the purpose of capturing the reduced value of a paired or related account when the two are added together.
- For example, a bond with a principal amount of $1,000 may be sold for only $950.
- 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.
- For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance.
- In reality, the actual number of company discounts came closer to $5 thousand.
- A contra account is an account with a balance opposite the normal accounts in its category.
Sales returns
- The list of asset accounts on your general ledger and balance sheet conveys the combined, potential value of all of the tangible and intangible items that your organization possesses.
- If your company has minimal contra revenue activity, it is acceptable to record these transactions within the revenue account.
- Since it is a contra asset account, this allowance account must have a credit balance (which is contrary to the debit balances found in asset accounts).
- There can be hidden value in stocks that have a lot of fully depreciated buildings.
- Consequently the net balance of the two accounts shows the net value of the sales after discounts.
- While both affect your net income, they do so in different parts of your income statement.
Contra liability accounts are special accounts in the liabilities section of the balance sheet. This would let users of the financial statements calculate the book value of the liability. Whenever the balance of a contra asset account increases (credit to the contra asset account), the increased amount is written off as an expense and is reported in the company’s income statement. Both the asset and the corresponding contra asset accounts must be stated clearly in the balance sheet. Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset’s net value or book value. The contra equity account treasury stock is reported right on the balance sheet.
Accumulated Depreciation as a Contra Asset
So an Accumulated Depletion account would serve as the contra for the parent Fixed Asset account. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting what is a contra account supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. Add the soaring expenses from the House v. NCAA settlement agreement — more than $22 million annually in revenue-sharing and scholarship increases — and the fiscal squeeze is next level from Morgantown to Tucson and Orlando to Ames.
Sales Discounts
To manage contra revenue effectively, focus on strategies that minimize these occurrences and enhance profitability. Refine your return policies to be clear yet reasonable, balancing customer flexibility with business protection. Also, optimize your discount strategies by offering them selectively based on customer segment or purchase behavior. Regularly review these policies and adjust based on data-driven insights to align with market conditions and customer expectations.
What is Accumulated Depreciation?
This is important for accurate financial reporting and compliance with… The purpose of a contra expense account is to record a reduction in an expense without changing the balance in the main account. The Allowance for Doubtful Accounts is used to track the estimated bad debts a company my incur without impacting the balance in its related account, Accounts Receivable. An estimate of bad debts is made to ensure the balance in the Accounts Receivable account represents the real value of the account. Allowance for Doubtful Accounts pairs with the Bad Debts Expense account when doing adjusting journal entries. A delivery van is purchased by a business to use in delivering product and picking up materials.
Contra accounts are worth a look
Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. To illustrate the contra revenue account Sales Returns and Allowances, let’s assume that Company K sells $100,000 of merchandise on credit. It will debit Accounts Receivable for $100,000 and will credit Sales for $100,000. If a customer returns $500 of this merchandise, Company K will debit Sales Returns and Allowances for $500 and will credit Accounts Receivable for $500. Company K’s income statement will report the gross Sales of $100,000 minus the sales returns and allowances of $500 and the resulting net sales of $99,500.
Is a Contra Account a Debit or Credit?
The sales allowances account 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. 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. For industries that rely on natural resources — mining, logging, oil, gas — depletion tracks the gradual exhaustion of the raw material in question, offsetting that loss in value against the initial appraisal of the land.