Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural 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.
Example of a 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. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns.
- The account is typically used when a company initially pays for an expense item, and is then reimbursed by a third party for some or all of this initial outlay.
- If you debit the contra account, ensure that you offset the related account with a credit balance.
- A contra revenue represents any deductions or offsets that need to be removed from gross revenue to provide a clearer understanding of actual income — such as in the example just provided.
- We will define what contra accounts are, the types of contra accounts and provide examples to illustrate.
- The use of a contra account allows a company to report the original amount and also report a reduction so that the net amount will also be reported.
- The revenue contra accounts Sales Returns, Discounts and Allowances are subtracted from the main Sales Revenue account to present the net balance on a company’s income statement.
Asset Contra Account
A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet. Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt. Properly documenting these contra accounts in your ledger can sometimes feel counter-intuitive since they operate in an opposite manner from their parent accounts.
Examples of Contra Accounts
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. The contra asset account Accumulated Depreciation is deducted from the related Capital Assets to present the net balance on the parent account in a company’s balance sheet. In the financial statements the purchases account would be offset against the contra expense accounts to show the net purchases. 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.
How to Set up Contra Accounts
When researching companies, the financial statement is a great place to start. Home Depot also devotes footnote 4 to its share repurchase program and reports that the company is authorized by its board to repurchase $20 billion in shares. Contra accounts are confusing at first, but, with a little study, understanding contra expense account them becomes second nature. Let’s go over how they work and what the main types are, and then finish with an example. Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees. Get instant access to video lessons taught by experienced investment bankers.
Discount on notes payable and discount on bonds are examples of contra liability accounts. Discount on Bonds Payable is a contra liability account with a debit balance that reduces the normal credit balance of its parent Bonds Payable liability account in order to present the net value of payables on a company’s balance sheet. Purchase returns, allowances and discounts are all examples of contra expense accounts. The accounts normally have a credit balance and in use are offset against the purchases account which is normally a debit balance. The net balance of the accounts shows the net value of the purchases made by the business for the accounting period. To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts.
Contra liability account example
- As can be seen using the two accounts, allows information about the original sale to be maintained on the revenue account, and details of the sale returns to be maintained on the sales returns contra revenue account.
- The contra asset account of your equipment account is the accumulated depreciation of equipment.
- The account is normally a debit balance and in use is offset against the revenue account which is normally a credit balance.
- Likewise, when you pay a bill, your cash account is reduced (credited) because you’re lowering the balance.
- 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).
- It is not classified as a liability since it does not represent a future obligation.
All three values can be useful for investors depending on what they’re looking for. A debit will be made to the bad debt expense for $4,000 to balance the journal entry. 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.
Contra Account Definition, Types, and Example
How to Record a Contra Account
- We’ll need to dig into the footnotes to find out what the contra accounts are.
- An expense account which is expected to have a credit balance instead of the typical debitbalance.
- You’ll continue to use the contra asset account until the equipment has been completely depreciated, retired, or sold.
- Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements.
- It then records $5,000 of contra expense against this account, which is derived from deductions taken from employee pay.
