What Is a Contra Account? Types + Examples

Examples of contra accounts include accumulated depreciation, allowance for doubtful accounts, and sales returns and allowances. Discount on notes payable is a contra liability account that is used to offset the balance of the notes payable account. It represents the amount of discount that was given when the notes were issued. The purpose of this account is to increase the effective interest rate of the notes. Discount on bonds payable is a contra liability account that is used to offset the balance of the bonds payable account. It represents the amount of discount that was given when the bonds were issued.

What are some examples of contra accounts?

For example, a company might have a contra asset account for depreciation expense and a separate asset account for equipment cost. There are several types of contra accounts, including accumulated depreciation, allowance for doubtful accounts, and sales returns and allowances. Each type of contra account represents a different aspect of a company’s financial position. A liability that is recorded as a debit balance is used to decrease the balance of a liability. It is not classified as a liability since it does not represent a future obligation. A liability recorded as a debit balance is used to decrease the balance of a liability.

Contra Asset Account Explained

For instance, the “Accumulated Depreciation” contra account offsets the value of fixed assets like machinery or contra expense account buildings, reflecting their reduced value over time due to wear and tear. Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance. The sales discounts contra revenue account records the discounts given to customers on sales made to them, normally a cash or settlement discount. The account is normally a debit balance and in use is offset against the revenue account which is normally a credit balance.

Trial Balance

It’s essentially a reverse investment; instead of pouring money in, the company is taking it back, reflecting a decrease in shareholders’ equity. This can have various strategic implications, from attempting to increase per-share earnings to trying to prevent takeovers. Contra equity accounts, therefore, act as a ledger for corporate strategy, impacting how the worth of a company is perceived from the outside. 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.

So, an organization looking for a robust accounting process must move to this reporting for better understanding. An example of contra equity with buying back shares or stock would be a company that has issued shares to the public. The contra equity account would be used to offset the equity account on the balance sheet. A contra equity account is an account that is used to offset another equity account on the balance sheet. Contra equity accounts are typically used for a company to buy back its stock or shares.

• The purpose of a contra account is to offset the balance of a related account.
• Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value.
• 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.
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• 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.
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Treasury Stock

Furthermore, if you subsequently pay off that debt early and capture a discount, the contra liability account — Discount Notes Payable — would record those savings. Another common contra liability account is a Discount on Bonds Payable account used by businesses that issue their own bonds. Transactions that involve contra accounts are recorded in the general ledger, which is a record bookkeeping of all financial transactions made by a company.

List with Examples

Businesses benefit by forecasting more realistic revenue figures, which helps in strategic planning and maintaining investor confidence. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account. The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold.

Everything You Need To Master Financial Modeling

The main contra equity account is treasury stock, which is the balance of all stock repurchased by the company. When a company repurchases shares, it increases the fractional ownership of all remaining shareholders. For example, when a customer’s cheque bounces, a https://www.facebook.com/BooksTimeInc contra account steps in to reconcile the situation financially. The initial receipt and the subsequent deduction are both logged, revealing the net effect of the transaction without distorting the total income. Also, when products are returned, Sales Returns and Allowances—a type of contra revenue account—offset the previously recognized sales revenue. Such accurate record-keeping is vital for maintaining the integrity of your financial reports.