Contra Accounts Examples & How They Work
The company predicts which accounts receivable won’t be paid by customers and writes those off. When the account receivable is written off, it is added to bad debt expense on the income statement and placed in the contra account. If a company has a high or fast-growing allowance as a percentage of accounts receivable, keep a close eye on it. In bookkeeping, a contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit (negative) balance. The account offsets the balance in the respective asset account that it is paired with on the balance sheet.
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With the appropriate level of automation integration in your chosen tool, you can pull the relevant values into these individual accounts directly from invoices, credit agreements, and other documentation. For industries that rely on natural resources — mining, logging, oil, gas — depletion tracks the gradual exhaustion of the raw material in question, offsetting that loss in value against the initial appraisal of the land. So an Accumulated Depletion account would serve as the contra for the parent Fixed Asset account. SaaS bookkeeping transforms bookkeeping into a strategic asset by leveraging cloud technology, automation, integration, and flexible subscriptions. Key features like real-time reporting, customizable dashboards, and mobile access help businesses stay agile and competitive.
Contra asset accounts journal entries
The amount is reported on the balance sheet in the asset section immediately below accounts receivable. There are three contra asset accounts that commonly appear in an organization’s chart of accounts. A contra revenue represents any deductions or offsets that need to be removed from gross revenue to provide a clearer understanding of actual income — such as in the example just provided. These accounts will typically help track sales discounts, product returns, and allowances (e.g., a price reduction for a good with minor defects).
The Contra Asset Account
- Note that in accounting, the term “book value” is also used interchangeably with net value.
- An item on one side of an account which offsets fully or in part on the opposite side of the same account is technically referred to as contra account.
- All three values can be useful for investors depending on what they’re looking for.
- For example, when your company borrows money, you would identify that debt in a Notes Payable account.
- This general structure can be applied across all contra types, so if the parent account has a credit, the contra account will have a debit.
- Conversely, for a contra asset account like depreciation, you would list all entries as a credit, carrying a negative total balance for the overall account.
Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement. Contra revenue accounts typically offset revenue accounts in a firm’s income statement. The contra liability account is less common than the contra asset account. An example of a contra liability account is the bond discount account, which offsets the bond payable account. A contra liability account is not classified as a liability, since it does not represent a future obligation.
To put it another way, a contra account is an account listed within a general ledger with the purpose of capturing the reduced value of a paired or related account when the two are added together. As such, for an asset or expense account that is naturally a debit account, the contra accounts will be in a credit position. For a liability or revenue account that are naturally credit accounts, the contra accounts will be in a debit position. The contra accounts will be grouped in the same category on the balance sheet or income statement as their related accounts.
A contra account is an account used in a general ledger to reduce the value of a related account when the two are netted together. The term “contra” means “against,” which perfectly describes the role these accounts play in your finances – they are going against the norm. There is the existence of contra accounts in accounting which are accounts that have the purpose of decreasing the value of another specific account if the two accounts are netted or summed together. Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a creditbalance.
The Contra Equity Account
