This general structure can be applied across all contra types, so if the parent account has a credit, the contra account will have a debit. Similarly, if the parent account lists entries as debits, the contra account will appear as a credit. We will define what contra accounts are, the types of contra accounts and provide examples to illustrate. Accounting sources advise that the full amount of a bad debt be written off to the profit and loss account or a provision for bad debts as soon as it is foreseen. Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers.
Contra Expense Account
Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000. In financial accounting and finance, bad debt is the portion of receivables that can no longer be collected, typically from accounts receivable or loans. If there’s an increase to allowance for uncollectible accounts, you record the same amount in the bad debt expense of your income statement. Similarly, accumulated depreciation accounts reduce the value of the fixed assets you report on your financial statements. The account Allowance for Doubtful Account is credited when the account Bad Debts Expense is debited under the allowance method. The most common contra account is the accumulated depreciation account, which offsets the fixed asset account.
Contra accounts definition
As your business acquires new assets (e.g., machinery, office equipment, vehicles), you record the initial purchase value in your Fixed Asset account. But these items don’t retain that initial value; if liquidated, they would likely be sold at a loss. In order to record this ongoing value drop, you would use a corresponding contra account — an Asset Depreciation account. A contra account provides missing context by pairing it with a related account.
- If you’re the one managing your company’s books of accounts, be sure to report the contra account on your financial statement on the line item directly beneath the main account.
- 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.
- 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.
- An example of a contra liability account is the bond discount account, which offsets the bond payable account.
- The articles and research support materials available on this site are educational and are not intended to be investment or tax advice.
- Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation.
What are the Five Types of Contra Accounts?
As such, for an asset or expense account that is naturally a debit account, the contra accounts will be in a credit position. For a liability or revenue account that are naturally credit accounts, the contra accounts will be in a debit position. Home Depot reports net receivables and net property and equipment, implying that both are reduced by contra assets. We’ll need to dig into the footnotes to find out what the contra accounts are.
Is a Contra Account a Debit or Credit?
The benefit of using the contra expense account is that the company’s managers can see in account 4210 the total amount that the company paid to the health insurance company. Then in account 4211 they can see the portion of the cost that was paid by the employees. The company’s income statement will report the combination of the amounts in accounts 4210 and 4211 in order to show the company’s actual expense of $8,000 ($10,000 minus $2,000). A company might decide to purchase its stock when the board of directors feel the stock is undervalued or when it wishes to pay its shareholders dividends.
Contra Account Definition, Types, and Example
A contra asset is paired with an asset account to reduce the value of the account without changing the historical value of the asset. Examples of contra assets include Accumulated Depreciation and Allowance for Doubtful Accounts. 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. Accounts receivable is rarely reported on the balance sheet at its net amount.
A contra account is also known as a valuation allowance, because it adjusts the carrying value of the account with which it is paired. If the bond is sold at a discount, the company will record the cash received from the bond sale as « cash », and will offset the discount in the contra liability account. Sometimes, we have an ancillary balance whose normal balance is the same as that of the parent account. For example, we need to keep the face value of a bonds payable and the premium amount in separate ledger accounts even though both have credit balances.
Contra Revenue Account
The purpose of the Owner’s Withdrawal account is to track the amounts taken out of the business without impacting the balance of the original equity account. A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting.
- But these items don’t retain that initial value; if liquidated, they would likely be sold at a loss.
- The discount on bonds payable amount shows the difference between the amount of cash received when issuing a bond and the value of the bond at maturity.
- The amount is reported on the balance sheet in the asset section immediately below accounts receivable.
- Therefore, for these three, the debit balance actually represents a negative amount.
- In finance, a contra liability account is one that is debited for the explicit purpose of offsetting a credit to another liability account.
- 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.
- CCC estimates that 5% of accounts receivable will most likely be unrecoverable.
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 contra expense account adjusting journal entries. 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.
- For the purpose of presentation on primary financial statements, we are often concerned only with the net figure of two similar classes/balances which we determine by subtracting one account from the another.
- By doing so, the company can accurately report the net expense, showcasing effective cost management and benefiting from favorable payment terms.
- A company creates allowances for doubtful accounts to record the portion of accounts receivable which it believes it will no longer be able to collect.
- The Notes Receivable account documents the total value of any promissory notes held by the company.
- 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.
