Contra Account: A Complete Guide + Examples Xero accounting

Contra Liability a/c is not used as frequently as contra asset accounts. It is not classified as a liability since it does not represent a future obligation. Including contra accounts on a balance sheet is important as it allows for a more transparent view of a company’s financial position. Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value. When the amount recorded in the contra revenue accounts is subtracted from the amount of gross revenue, it equals the net revenue of a company. In case a customer returns a product, the company will record the financial activity under the sales return account.

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Contra liability accounts

For example, when a line item on your balance sheet presents the balance of accounts receivable, report the value of allowance of uncollectible accounts below the accounts receivable line. Be sure to enter the contra account on the opposite column of the account they’re offsetting. If contra assets appear in the credit column, record contra liabilities on side. These less-frequent contra accounts come into play when you need to account for changes in the outstanding liabilities for your business. For example, when your company borrows money, you would identify that debt in a Notes Payable account.

Contra Asset Accounts

In this example, the accounts receivable is 10,000, and the allowance for doubtful debt contra account is 1,000, leaving a balance of 9,000. Although the car is normally an asset because you can sell it for parts or use it for your business, when the car depreciates to a zero or negative balance, it is a contra expense accounts contra asset on your balance sheet. An expense account which is expected to have a credit balance instead of the typical debitbalance. 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.

In the financial statements the purchases account would be offset against the contra expense accounts to show the net purchases. The credit side of the amortization entry may go directly to the intangible asset account depending on the asset and materiality. Depreciation entries always post to accumulated depreciation, a contra account that reduces the carrying value of capital assets.

• They are useful in preserving the historical value in the main account while presenting a write-down or decrease in a separate contra account that nets to the current book value.
• By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount.
• The depreciated amount expensed each year is a tax deduction for the company until the useful life of the asset has expired.
• There are also differences in the methods allowed, including acceleration.
• 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.
• In this way, a contra asset (credit) lowers the overall value of your accounts receivables (debit) on the balance sheet.
• For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense.

Or, if the contra liability account balance is immaterial, the accounting staff could elect not to keep a balance in the account at all. When the amount is material, the line item is typically presented separately on the balance sheet, below the liability account with which it is paired. The debit balances in the above accounts are amortized or allocated to an expense, such as Interest Expense over the life of the bonds or notes payable.

Why are Contra Accounts Inportant?

Similarly, if the parent account lists entries as debits, the contra account will appear as a credit. Consider a business that offers an early payment discount to its customers, cutting their invoiced total by 3% if they pay within 1 week of invoicing. If every single buyer had taken advantage of the early payment discount, the company would have provided roughly $10 thousand in discounts during that same timeframe. https://www.bookstime.com/articles/cannabis-accounting In reality, the actual number of company discounts came closer to $5 thousand. As evident from the table below, each contra account has a parent account whose normal balance is often exactly opposite of the normal balance of the relevant contra account. In order to keep the accounts receivables as clean as possible with their historical values, we will use this contra account called allowance for doubtful accounts.

The difference between an asset’s balance and the contra account asset balance is the book value. 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. 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. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. These contra revenue accounts tend to have a debit balance and are used to calculate net sales.

• Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset.
• This type of account could be called the allowance for doubtful accounts or a bad debt reserve.
• Then in account 4211 they can see the portion of the cost that was paid by the employees.
• A key example of contra liabilities includes discounts on notes or bonds payable.
• For example, when your company borrows money, you would identify that debt in a Notes Payable account.
• Examples of contra assets include Accumulated Depreciation and Allowance for Doubtful Accounts.