The account offsets the balance in the respective asset account that it is paired with on the balance sheet. Instead of reporting the net sales on the income statement directly, the sales returns are shown as well. Assume that a company uses a contra expense account to record the amounts that employees paid toward the company’s health insurance costs. For instance, the company might debit its expense account 4210 Employee Health Insurance Expense when recording the insurance company’s invoice of $10,000. If the company withholds $2,000 from its employees’ wages to pay part of the cost of the insurance, the company will credit its contra expense account 4211 Employee Withholdings for Health Ins. Writing off your obsolete inventory in this manner allows you to expense the cost of the obsolete inventory while also decreasing your current inventory balance using the contra asset account.

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.
• Netbook value or carrying amount of an asset is its historical cost less accumulated depreciation.
• For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account.
• Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.
• The contra equity account treasury stock is reported right on the balance sheet.

However, some asset accounts need a negative counterpart to reduce the balance of that account. The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. This means that entries recorded on the left side of the T-account will increase the asset balance and entries recorded on the right side will decrease it.

Why are contra asset accounts important for businesses?

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. 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. Inventory obsolescence is an expense account, while the allowance for obsolete inventory is a contra asset account, which aims to reduce the inventory valuation on your balance sheet. Your bank account, the inventory you currently stock, the equipment you purchase, and your accounts receivable balance are all considered asset accounts. Contra liability accounts are special accounts in the liabilities section of the balance sheet.

• By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company.
• A contra account is also known as a valuation allowance, because it adjusts the carrying value of the 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.
• Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns.
• A contra account provides missing context by pairing it with a related account.
• These examples illustrate how contra accounts are used in various contexts to provide a more accurate picture of a company’s financial position and performance.
• The following are examples of commonly-used contra asset accounts you could create to better understand your business financials.

What is asset? Definition, Explanation, Types, Classification, Formula, and Measurement

• Examples of revenue contra accounts are Sales Discounts, Returns and Allowances.
• Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc.
• All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
• Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value.
• Other than the above contra-asset accounts, we often see contra-revenue accounts for any sales returns or sales rebates.

Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock. The auditors aim to keep the balances at their adequate levels, but the controller might want to keep them as low as possible to reduce expenses and maximize profit levels. CCC bought equipment and machinery worth $100,000 at the beginning of the current financial year and estimates that the equipment and machinery will depreciate by $10,000 every year.

Taking a closer look at contra asset accounts

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. Accountants use contra accounts rather than reduce the value of the original account directly contra expense account to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming. The contra asset account, accumulated depreciation, is always a credit balance.

The credit balance in the liability account Bonds Payable minus the debit balances in the contra-liability accounts Discount on Bonds Payable and Bond Issue Costs results in the carrying value or book value of the bonds. The credit balance in Notes Payable minus the debit balances in Discount on Notes Payable is the carrying value or book value of the notes payable. Sales returns, sales allowance and sale discounts are different examples of contra revenue accounts. Contra accounts such as these have a debit balance and are deducted from the total amount of a company’s revenue. Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement.

Income Statement: Definition, Types, Templates, Examples, and More

• 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.
• Taking the example of CCC again, the company has $50,000 in accounts receivable at year-end of December 31.
• As mentioned, contra asset accounts usually have a negative value which is the same as a credit balance.
• A debit will be made to the bad debt expense for $4,000 to balance the journal entry.
• To obtain a cash payout before the note reaches maturity, you can sell these notes to a bank or other financial institution for some price below the note’s face value.

The net amount is often referred to as the carrying amount or perhaps the net realizable amount. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. Netbook value or carrying amount of an asset is its historical cost less accumulated depreciation. Instead of reporting the assets at their carrying amount directly, assets are reported at their historical costs and are reduced to book value by reporting the allowance for depreciation along with it.

Including contra accounts on a balance sheet is important as it allows for a more transparent view of a company’s financial position. 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.

What is a Contra Revenue Account?

This helps the reader to know how many sales were actually made and how many customers had problems with the goods sold.