This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000. It can be used for any type of account such as asset, liability, capital, revenue. For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance. The hottest retail item of today can be relegated to nostalgia channels on YouTube tomorrow. And when your business still has some of these outdated, unwanted, or unusable items in your inventory, you’ll want to offset the lost value of these assets in your general ledger and balance sheet. So rather than adjusting your Inventory account, you would update its contra account — Obsolete Inventory.
Home Depot reports net receivables and net property and equipment, implying that both are reduced by contra assets. We’ll need to dig into the footnotes to find out what the contra accounts are. 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. But in the real world, converting all of that potential into hard cash is highly unlikely, if not impossible.
- In essence, contra accounts allow you to report your firm’s gross and net amounts.
- Contra accounts are an essential component of the accounting process, designed to reflect the true value of assets, liabilities, equity, or revenue of a business.
- Allowance for uncollectible accounts, or allowance for doubtful accounts, is one of the most common contra current asset 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.
- If you debit the contra account, ensure that you offset the related account with a credit balance.
To oppose the revenue made by a company, contra revenue accounts must have a debit balance. Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets. In case the contra asset account is not listed in the balance sheet, it must be listed in the footnotes of the financial statement for the users to be informed. For instance, if a company has a plant asset such as Equipment with a debit balance of $92,000 and the account Accumulated Depreciation has a credit balance of $50,000, the carrying amount (or book value) of the equipment is $42,000. You may use accounting software packages, such as QuickBooks Online to set up contra accounts. Simply hit Control + N under the Chart of Accounts or Edit, then click New (to create a new account).
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 contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability.
In the above example, the debit to the contra liability account of $100 lets the company recognize that the bond was sold at a discount. A contra revenue account allows a company to see the original amount sold and to also see the items that reduced the sales to the amount of net sales. Another description of a contra expense account is an account that reduces or offsets the amounts reported in another general ledger expense account(s). Contra asset accounts provide business owners with the true value of certain asset accounts. For example, let’s say your accounts receivable balance is currently $11,500, but you’re not entirely sure that you’ll be able to collect the entire balance due. 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.
Accumulated depreciation is the total of all depreciation that has been charged to existing fixed assets such as equipment and buildings. There can be hidden value in stocks that have a lot of fully depreciated buildings. Companies like to depreciate assets as quickly as possible to get the tax savings, so the balance sheet may not state the true value of fixed assets. At Invoiced, we provide a suite of solutions that work together to make managing your invoicing, accounts receivable, and accounts payable seamless and easy. To convert your invoice management efforts to an electronic format that can easily share data with other financial systems, businesses can leverage Invoiced’s E-invoice Network.
Example of a Contra Liability Account
This helps the firms to evaluate the book value of their assets and liabilities. If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative. On the other hand, if you’re looking at a high-flying growth stock that reports new revenue growth records each quarter but has a massive allowance for doubtful accounts, there may be problems ahead. In its general ledger, the business will want to capture its gross sales figures and the actual value of the discount.
Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a creditbalance. In terms of the journal entries, the debit balance in “Discount on Bonds Payable” is subtracted from the credit balance in the “Bonds Payable”. The first contra liability listed is an original issue discount (OID), a feature of debt financing wherein the issuance price is less than the redemption price. 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.
Is a Contra Account a Debit or Credit?
Anytime you need to depreciate an asset, you’ll use an accumulated depreciation contra asset account, which records the amount of depreciation that has been expensed while offsetting the value of the asset being depreciated. Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable. They are used in case some customers won’t be able to pay the money they owe to the business. Including contra revenue accounts is important in the income statement because it shows the original amount of sales the firm has made, along with any factor that has reduced that amount. Note that the contra liability account has a positive balance (a debit balance), and the liability account normally has a credit balance. Hence, the book value of the liability will be the credit balance of the liability account minus the debit balance of its contra liability counterpart.
Asset accounts always maintain a debit balance, so anytime that you increase the value of an asset, such as when you deposit customer payments or invoice a customer, that asset account is debited or increased. Likewise, when you pay a bill, your cash account is reduced (credited) because you’re lowering the balance. Each of these https://personal-accounting.org/s serves to provide more detailed information about the transaction history of the related main account. By tracking contra accounts, a company can make more informed decisions about asset management, liability settlement, and overall financial planning. Contra accounts are an essential component of the accounting process, designed to reflect the true value of assets, liabilities, equity, or revenue of a business. They provide a more nuanced picture of a company’s finances, allowing stakeholders to make informed decisions based on realistic, transparent financial information.
Why Use a Contra Account?
Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks. In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000. If the asset account had a credit balance or the contra asset account had a debit balance, this would indicate an error in the journal entries. A contra asset account is an account in the balance sheet that offsets the balance of a regular asset account.
Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. A contra revenue account is a revenue account that is expected to have a debit balance (instead of the usual credit balance). In other words, its expected balance is contrary to—or opposite of—the usual credit balance in a revenue account. A contra expense account is a general ledger expense account that will intentionally have a credit balance (instead of the debit balance that is typical for an expense account).
The two most common contra accounts are the allowance for doubtful accounts/bad debt reserve, which is subtracted from accounts receivable, and accumulated depreciation, which is subtracted from fixed assets. Examples of a contra revenue accounts include sales returns, sales discounts, and sales allowances. You debit the contra revenue accounts and credit the corresponding revenue accounts. For example, when you debit the balance in sales returns account, make sure that you offset the sales revenue account with a credit balance. Contra equity accounts are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds. Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances.
In other words, contra revenue is a deduction from gross revenue, which results in net revenue. 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.” Accounting software can simplify the management of and reporting from your ledger.
For example, a bond with a principal amount of $1,000 may be sold for only $950. The bond is listed on the balance sheet at the full amount of $1,000, but the cash received is just $950, so a contra liability for the discount is listed to make the entry balance. Nor would it count as a liability as it does not reflect a future obligation. 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.