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For instance, a contra account that relates to an accounts receivable is called a contra asset account. There are different types of Contra Accounts and the most common are contra asset, contra liability, contra equity and contra revenue accounts. The outstanding balance of a contra asset account represents a credit figure. These accounts are maintained individually and are adjusted from the corresponding asset’s balance to show the net amount of the assets in financial statements. Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable. They are used in case some customers won’t be able to pay the money they owe to the business. In response, the firm should decrease its accounts receivable and revenue balances.
At the same time, the bank adds the money to its own cash holdings account. But the customer typically does not see this side of the transaction. The Balance sheet example running throughout the Business Encyclopedia has several contra account examples.
Accumulated depreciation
Again, accumulated depreciation reduced fixed and capital asset balances. Apple breaks out its amount of property, plant, and equipment (PP&E) and then lists its accumulated deprecation that reduces the PP&E figure. “Daybooks” or journals are used to list every single transaction that took place during the day, and the list is totaled at the end of the day. These daybooks are not part of the double-entry bookkeeping system.
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Need a robust accounting system; else, operational difficulties may arise. Robert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive. What is a Contra Asset Account: Definition and Example He is a professor of economics and has raised more than $4.5 billion in investment capital. Nora O’Malley covers small business finance and entrepreneurship topics for The Balance.
Contra Asset Account Definition
Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value. Contra asset accounts are prepared so that an asset’s gross value and deductions can be shown separately. The accounting rules applicable to contra asset accounts are exactly opposite to asset accounts.
What Are the Different Types of Contra Accounts?
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 reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance.
Totaling of all debits and credits in the general ledger at the end of a financial period is known as trial balance. This use of the terms can be counter-intuitive to people unfamiliar with bookkeeping concepts, who may always think of a credit as an increase and a debit as a decrease. This is because most people typically https://business-accounting.net/ only see their personal bank accounts and billing statements (e.g., from a utility). A depositor’s bank account is actually a Liability to the bank, because the bank legally owes the money to the depositor. Thus, when the customer makes a deposit, the bank credits the account (increases the bank’s liability).
Accounts in Accounting
The bad debt, or allowance for doubtful accounts has a credit balance to offset the value of accounts receivable. You can use this contra asset account to represent this uncertainty. The amount for estimated uncollectible accounts is a bad debt operating expense. The allowance for doubtful accounts is the contra account that reduces the accounts receivable to an estimated realizable amount.
- In such cases, the seller may appoint one of its own sales staff as Account Manager, focusing primarily on that account.
- However, they will still appear on the notes to the financial statements with necessary disclosures.
- Free Cash Flow The money left over after a company supports operations can be a snapshot of its financial health.
- In this scenario, a write-down is recorded to the reserve for obsolete inventory.
A company may decide to buy back its shares when management feels the stock is undervalued or because it desires to pay stock dividends to its shareholders. A contra account is used for account classification and is also reported in a company’s financial statement alongside its corresponding or related account. When reporting a contra account in a company’s financial statement, it is reported immediately below the account it relates to or corresponds. Contra accounts have different names depending on the account they correspond.
