What Is a Contra Account?
A contra account is utilized in a general ledger to reduce the value of a connected account when the two are netted together. A contra account's natural balance is something contrary to the associated account. In the event that a debit is the natural balance recorded in the connected account, the contra account records a credit. For instance, the contra account for a fixed asset is accumulated depreciation.
Understanding a Contra Account
Contra accounts are reported on the equivalent financial statement as the associated account. For instance, a contra account to accounts receivable, frequently called allowance for doubtful accounts, is a contra asset account.
This type of account could be called the allowance for doubtful accounts or bad debt reserve. The balance in the allowance for doubtful accounts addresses the dollar amount of the current accounts receivable balance that is expected to be uncollectible. The amount is reported on the balance sheet in the asset section quickly below accounts receivable. The net of these two figures is regularly reported on a third line.
Accountants use contra accounts as opposed to reduce the value of the original account straightforwardly to keep financial accounting records clean. On the off chance that a contra account isn't utilized, it very well may be hard to decide historical costs, which can make tax readiness more troublesome and tedious.
By keeping the original dollar amount flawless in the original account and diminishing the figure in a separate account, the financial information is more transparent for financial reporting purposes. For instance, on the off chance that a piece of heavy machinery is purchased for $10,000, that $10,000 figure is kept up with on the overall ledger even as the asset's depreciation is recorded separately.
Contra accounts give more detail to accounting figures and further develop transparency in financial reporting.
Types of Contra Accounts
There are four key types of contra accounts — contra asset, contra liability, contra equity, and contra revenue. Contra asset accounts incorporate allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that diminishes the balance of an asset.
A key illustration of contra liabilities remember discount for notes or bonds payable. Contra liabilities hold a debit balance. Contra liability accounts are not quite so famous as contra asset accounts.
A liability that is recorded as a debit balance is utilized to diminish the balance of a liability. The balance of a contra liability account is a debit balance. This account diminishes the value of the liability. Contra Liability a/c isn't utilized as habitually as contra asset accounts. It isn't classified as a liability since it doesn't address a future obligation.
The third contra type is contra equity. These contras reduce the equity account and carry a debit balance. Contra equity reduces the total number of outstanding shares on the balance sheet. The key illustration of a contra equity account is Treasury stock, which addresses the amount paid to buyback stock.
Presently, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. Contra revenue reduced gross revenue, bringing about net revenue. These contra revenue accounts will generally have a debit balance.
Instructions to Record a Contra Account
At the point when a contra asset account is first recorded in a journal entry, the offset is to an expense. For instance, an increase as a credit to allowance for doubtful accounts is likewise recorded as a debit to increase [bad debt expense](/terrible debt-expense).
While accounting for assets, the difference between the asset's account balance and the contra account balance is alluded to as the book value. There are two major methods of figuring out what ought to be booked into a contra account.
The allowance method of accounting permits a company to estimate what amount is reasonable to book into the contra account. The percentage of sales method expects that the company can't collect payment for a fixed percentage of goods or services that it has sold. The two methods bring about an adjustment to book value.
For instance, a company has $40,000 worth of accounts receivable at September month-end. It estimates 10% of its accounts receivable will be uncollectible and proceeds to make a credit entry of 10% x $40,000 = $4,000 in the contra account, allowance for doubtful accounts.
To balance the journal entry, a debit will be made to the terrible debt expense for $4,000. Albeit the accounts receivable isn't due in September, the company actually needs to report credit losses of $4,000 as terrible 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.
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The difference between an asset's account balance and the contra account balance is known as the book value.
Illustration of a Contra Account
A major illustration of a contra account is the accumulated depreciation. Once more, accumulated depreciation reduced fixed and capital asset balances. Apple breaks out its amount of property, plant, and equipment (PP&E) and afterward records its accumulated belittling that reduces the PP&E figure.
For fiscal year 2020, Apple's gross PP&E (which incorporates land, structures, machinery, and so on) came in at $103.5 billion. In the mean time, its accumulated depreciation and amortization figure comes in at $66.8 billion. This is the way Apple break it down in their annual report:
Contra Account FAQs
What Is the Benefit of Using a Contra Account?
Contra accounts are utilized to reduce the value of the original account straightforwardly to keep financial accounting records clean. In the event that a contra account isn't utilized, it very well may be challenging to decide historical costs, which can make tax readiness more troublesome and tedious.
What Are the Different Types of Contra Accounts?
There are four key types of contra accounts — contra asset, contra liability, contra equity, and contra revenue. Contra assets decline the balance of a fixed or capital asset, carrying a credit balance. Contra liabilities reduce liability accounts and carry a debit balance. Contra equity accounts carry a debit balance reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance.
What Are Examples of a Contra Asset Account?
Key instances of contra asset accounts incorporate allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts reduce accounts receivable, while accumulated censure is utilized to reduce the value of a fixed asset.
Contra accounts are utilized to reduce the original account straightforwardly, keeping financial accounting records clean. This takes into consideration the simple determination of historical costs. This is especially important for contra asset accounts. The difference between an asset's balance and the contra account asset balance is the book value.
- Contra accounts are introduced on a similar financial statement as the associated account, commonly showing up straightforwardly below it with a third line for the net amount.
- They are helpful to preserve the historical value in a primary account while introducing a decline or write-down in a separate contra account that nets to the current book value.
- Note that accountants use contra accounts instead of reduce the value of the original account straightforwardly to keep financial accounting records clean.
- A contra account is an account utilized in an overall ledger to reduce the value of a connected account.
- Key instances of contra accounts incorporate accumulated belittling and allowance for doubtful accounts.