contra accounts list

When a good is sold on credit, the amount receivable from customers is shown under the debtor’s balance sheet balance. It is a standard business practice to prepare an estimate for the amount likely to go bad. The provision for doubtful debts is a contra asset account related to debtors. Sale on account, which can also be known as a sale on credit or credit sales, refers to when businesses give a product over to a customer and customers do not have to pay until later. Credit sales are often risky because the chance of not collecting on the accounts receivable increases uncollectable percentages of credit sales, where the amount must be estimable and probable. Accounting for the contrary in a business will show the normal business account value, the attached contra account underneath it, with the net revenue the business experienced below.

The most common contra account is the accumulated depreciation account, which offsets the fixed asset account. The fixed asset account contains the original acquisition cost of a number of fixed assets, while the contra account contains the sum total of all the depreciation expense that has been charged against those assets over time. Taken together, the asset account and contra asset account reveal the net amount of fixed assets still remaining. 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. A contra asset account is a type of asset account where the account balance may either be a negative or zero balance. This type of asset account is referred to as “contra” because normal asset accounts might include a debit, or positive, balance, and contra asset accounts can include a credit, or negative, balance. Because of the oppositional nature of these asset accounts, the contra account acts as a ‘contrary’ element to the debit balances of regular asset accounts.

Understanding a Contra Account

A contra liability account is not classified as a liability, since it does not represent a future obligation. Even though a contra asset account shows negative or zero balances in credits within the account, it can still be advantageous for businesses to show any contra asset accounts they currently have within their balance sheets. The following are several key reasons why it can be important to include contra asset accounts on a balance sheet. 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.

  • If the related account has a debit as the natural balance, then the contra account will record a credit.
  • When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value.
  • Contra accounts appear on the same financial statement as the related account.
  • Contra Asset AccountA contra asset account is an asset account with a credit balance related to one of the assets with a debit balance.
  • Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance.
  • 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.

This type of contra account is listed in conjunction with an inventory asset. If that becomes unsellable, you would credit an allowance for $5,000 obsolete. This essentially erases the asset on your financial statement, leaving you with a total amount What Is a Contra Account & Why Is It Important? A contra revenue account is a revenue account that is expected to have a debit balance .

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The company should maintain a separate accounting of contra revenue for a better presentation of financial statements and estimate the product’s quality. A contra expense account is an account used to reduce the amount of an expense without changing the balance in the main expense account.

contra accounts list

Its purpose includes selling the asset to another business unit, merger and acquisition. Fixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time.

Example of a Contra Account

Trade accounts receivable – Trade receivables are the amount owed by customers that have been billed but payment has not been made yet. Accounting is how we tell a story about an economic event or financial transaction, such as a purchase or a withdrawal of money, for example. Periodic financial statements report the impact of the story and are used by leaders of a firm or industry to analyze performance, plan, and respond.

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Another example could be when a product is bought and is returned at face value because of a defect. The contra return on sales account will be debited while the normal cash account will be credited. A contra account is used to record adjustments and transactions that have an opposing impact to report the true value of a firm’s financial statements. Contra accounts are commonly found on general ledgers where all of a business’s accounts and transactions are organized on a master list. The contra account is used to report the correct assets while preserving the transactions and balance of the relating account. The most common contra assets are accumulated depreciation and the allowance for doubtful accounts.

Contra Account

Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. A contra account offsets the balance in another, contra accounts list related account with which it is paired. Contra accounts appear in the financial statements directly below their paired accounts.

contra accounts list

Since the entry for cash sales is recorded as a credit in a revenue account, then a return on sales will be recorded as a debit in the revenue contra account, Return on Sales or Sales Returns and Allowances. Although you may be familiar with the normal balance requirements of each classification, a contra account will have the opposite requirement. Learn about the meaning of contra accounts, how and why they are used, and how to account for balances with them. For instance, if a company has a plant asset such as Equipment with a debit balance of $92,000 and the account Accumulated Depreciation has a credit balance of $50,000, the carrying amount of the equipment is $42,000.

The allowance for doubtful accounts is not specifically reported, but the 10 reported that the allowance is immaterial to the amount. This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms. Most accounts receivable would just be the time between purchase https://online-accounting.net/ and credit card settlement. For example, a bond with a principal amount of $1,000 may be sold for only $950. The bond is listed on the balance sheet at the full amount of $1,000, but the cash received is just $950, so a contra liability for the discount is listed to make the entry balance.

  • 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.
  • The netbook value of the machinery by the end of the first year will be $80,000 ($100,000-$20,000) and $60,000 ($100,000-$40,000) by the end of the second year.
  • Discount on notes receivable refers to a contra asset account that occurs when the current value of a note receivable amounts to less than the face value of the note.
  • Contra LiabilityFinancing fees in M&A are an example of a contra liability, as the fees are amortized over the debt’s maturity – which in turn reduces the tax burden until the end of the term.

It is a general ledger account to have its balance be the opposite of the original balance for that account. It is linked to specific accounts and is reported as reductions from these accounts. The company should know the reasons for the increase in contra-revenue every month to save extra cost and time. The company can estimate the quality of products based on sales return quantity and amount of product. In the above case, the company will bear a loss margin of $100, and the contra revenue amount is $100.00. When the company pays the cost of having the flyer printed, a journal entry is done. Globally Accepted Accounting PrinciplesGAAP are standardized guidelines for accounting and financial reporting.

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