What Is a Contra Account? Types + Examples

However, these vehicles have experienced significant wear and tear in the intervening years. And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs. Home Depot also devotes footnote 4 to its share repurchase program and reports that the company is authorized by its board to repurchase $20 billion in shares. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer.

How are contra accounts recorded?

The accumulated depreciation account is perhaps the most common contra asset account used by business owners. Therefore, to ensure accounts receivable stays clean and transparent, CCC will record $2,500 in the contra asset account called “Allowance for Doubtful Accounts”. This will ensure the net value of accounts receivable at year-end is not overstated. The hottest retail item of today can be relegated to nostalgia channels on YouTube tomorrow.

Purchase Return, Allowance, and Discount Contra Expense Accounts

Consequently the net balance of the two accounts shows the net value of the sales after discounts. This depreciation is saved in a contra asset account called accumulated depreciation. The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment. The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. Contra liability, equity, and revenue accounts have natural debit balances.

Asset Contra Account

In footnote 3, the company reports, “Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021.” The purpose of the Sales Returns account is to track the reduction in the value of the revenue while preserving the original amount contra expense account of sales revenue. A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.

Do Contra Accounts Have Debit or Credit Balances?

A debit will be made to the bad debt expense for $4,000 to balance the journal entry. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad 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. When a contra asset account is first recorded in a journal entry, the offset is to an expense. 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 benefit of using the contra expense account is that the company’s managers can see in account 4210 the total amount that the company paid to the health insurance company.

As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find. Companies bury them in the footnotes and often don’t break out the actual calculation. Still, it is important when possible to consider how the net accounts are calculated and be wary of companies that are reporting a ton of bad debts. The contra equity account treasury stock is reported right on the balance sheet.

Contra accounts are worth a look

All three values can be useful for investors depending on what they’re looking for. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value.

Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount. 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. 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.

• We will define what contra accounts are, the types of contra accounts and provide examples to illustrate.
• The purpose of the Sales Returns account is to track the reduction in the value of the revenue while preserving the original amount of sales revenue.
• Examples of revenue contra accounts are Sales Discounts, Returns and Allowances.
• This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms.
• Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a creditbalance.
• Now, if that sounded like a lot of mumbo-jumbo jargon to you, don’t worry.

Typically, these notes reflect purchases made on credit by your customers. 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 following are examples of commonly-used contra asset accounts you could create to better understand your business financials. However, it’s important to keep in mind that you can create any contra account you want to more clearly describe your business — this is not an exhaustive or definitive list. The list of asset accounts on your general ledger and balance sheet conveys the combined, potential value of all of the tangible and intangible items that your organization possesses.

• For example, when depreciating an asset, the accumulated depreciation account is used to reduce the book value of the asset while also keeping track of the total amount of depreciation that has been posted to date.
• Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory.
• In order to record this ongoing value drop, you would use a corresponding contra account — an Asset Depreciation account.
• 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.