What is a Contra Asset Account? Definition, Types, Example, and More

Contains the amount of sales discount given to customers, which is usually a discount given in exchange for early payments by customers. All “mini-ledgers” in this section show standard increasing attributes for the five elements of accounting. Contra and adjunct accounts often appear immediately below the line item they’re affecting. Such disclosures are deemed necessary if the information appearing on a statement is thought to be misleading without their inclusion.

• A contra liability account is not classified as a liability, since it does not represent a future obligation.
• Notes payable represents a liability created when a company signs a written agreement to borrow a specific amount of money.
• 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.
• For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately.
• To avoid this loss of important data, we record actual cost and depreciation in separate ledger accounts.

That is because some of the bonds are issued at a discount, so this reduces the balance of their bonds payable. Contra accounts are additional accounts that are maintained to bring more accuracy to the financial statement of a company. They are used to keep track of the historical cost of assets instead of reducing the value of an asset. Another example of a contra account is a discount allowed account, which is the contra account to revenue account.

List of Contra Accounts:

Suppose a clothing business has sold $50,000 of inventory on credit. Sales discounts are when the company reduces the price of a certain product whenever the customer completes the payment early. Sales returns and allowances are when customers return a product they bought to get a partial or full refund. Allowance for doubtful accounts, the counterpart of accounts receivable. Doubtful debts are those debts that a company believes will not be received in the future.

This asset is shown at its actual cost at the time of purchase and then depreciation on the asset during the useful life is shown as a deduction from that cost. Maintaining a contra account is important as it provides more clarity on the dealings of a company. It clearly shows how the balances are offset and helps in establishing the matching principle. Contra accounts help the user of the financial statement to get clear information, which helps in making the statement more understandable.

What is a Contra Account?

An adjunct account is an account in financial reporting that increases the book value of a liability account. The difference between an asset’s account balance and the contra account balance is known as the book value. The amount is reported on the balance sheet in the asset section immediately below accounts receivable.

• Notes PayableNotes Payable is a promissory note that records the borrower’s written promise to the lender for paying up a certain amount, with interest, by a specified date.
• A contra account is an account whose balance is the opposite of a corresponding account.
• Before the advent of computerized accounting, manual accounting procedure used a ledger book for each T-account.
• In this scenario, a write-down is recorded to the reserve for obsolete inventory.
• Normal discounts usually consist of a marketing strategy, when a customer purchases a large volume of product, or if a customer wants to make early payments on the product.
• Contra asset account examples include any transaction made on a contra account to balance out the debit account.

Cross references and contra items are one of several ways to communicate material information that is supplementary to the items appearing on the company’s balance sheet. Cross references are used to communicate direct relationships between assets and liabilities. Contra accounts are used to reduce an asset, liability, or owner’s equity line item.

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A contra account is an account whose balance is the opposite of a corresponding account. In finance, a contra account reduces the value of related or corresponding account. It offsets the balance of the related account, which means when the corresponding account is positive, a contra account will be negative. Learn why contra accounts, when utilized correctly along with a paired account, are a crucial component of accurate accounting and financial review.

Which means we can’t just credit the building account when it depreciates. Therefore we need another way to bring its value/net balance down. Contra accounts allow us to report the true value of a organization’s assets. The balance of the contra account will equalizer its parent account while still stabilizing the value of the transactions contra definition accounting identified in the relating account. At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset. It can retire the shares, meaning that they will no longer be existent on the company’s financial statements as treasury stock.

Introduction to Business

The difference between a normal account and a contra account is that, if there is a debit balance in the normal account, you will have the opposite balance in the contra account. In the case of an accumulated depreciation account, the asset account always has debit balance, whereas a contra account will show a credit balance. A contra account is an account created for clarification about any adjustments made to an existing item in ledger accounts.

• Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off.
• The contra liability account is less common than the contra asset account.
• Allowance for doubtful accounts, the counterpart of accounts receivable.
• Sales discount accounts record the discounts provided to customers when they purchase in bulk or make early payments.
• The account shows the total that is owed to or by that business at a particular time.
• Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns.

We need to show the net book value of the property plant and equipment which equals the cost of PPE offset by related accumulated depreciation which is a contra account. In the books, the account of the asset would have a debit value of $100,000, and the CA account would have a credit value of $30,000. If the asset account had a credit balance or the CA account had a debit balance, this would indicate an error in the journal entries. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account.

A Contra Account is where we record transactions that are opposing to a general ledger parent account, also called a relating account. In Accounting terms, a contra account refers to an account which is balanced against an account. The auditors aim to keep the balances at their adequate levels, but the controller might want to keep them as low as possible to reduce expenses and maximize profit levels. It is an account used to decrease the value of the account related to the contra account.

Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount. The contra account definition in business accounting is an account used in the general ledger for the purpose of reducing the amount in another account related to it. A general ledger is a comprehensive list of all accounts and their connected transactions in a business.