Contra Accounts Examples & How They Work

Contra Accounts Examples & How They Work

contra asset

Accumulated depreciation offsets a company’s real property assets, such as buildings, equipment and machinery. Accumulated deprecation represents the cumulative amount of depreciation expense charged against an asset. There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease 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.

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. Contra accounts appear on the same financial statement as the related account. For example, an accounts receivable’s contra account is a contra asset account account.

What is a contra account?

This is done by separating the decreases that have occurred in the contra account from the original transaction amount. This allows the reader to see both the current and historical book values for a particular asset or liability. A contra account is a balance sheet account that is used to offset a related asset, liability, or equity account. Contra accounts are used to ensure the proper valuation of these items is reflected on the balance sheet.

A contra account is a general ledger account with a balance that is the opposite of another, related account that it is paired with. If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee. This account serves two purposes — tracking total depreciation expenses while providing you with the accurate book value of the asset being depreciated.

How to Use Contra Asset Accounts

Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Contra LiabilityFinancing fees in M&A are an example of a contra liability, as the fees are amortized over the debt’s maturity – which in turn reduces the tax burden until the end of the term. Liabilities AccountsLiability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company. This transaction records when a customer returns the paid goods, and a refund must be given.

  • A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger.
  • When a company gives a discount to customers in an effort to convince them to buy its goods or services, it is recorded in the discount on sales account.
  • 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.
  • Likewise, when you pay a bill, your cash account is reduced because you’re lowering the balance.
  • The use of Allowance for Doubtful Accounts allows us to see in Accounts Receivable the total amount that the company has a right to collect from its credit customers.

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