And why stop at just theory when you can apply what you’ve learned using premium templates? Upgrade your productivity and performance with ready-to-use accounting templates designed to streamline contra account management. These plug-and-play resources—available with paid memberships—can be a game-changer for both seasoned accountants and those new to the field, ensuring accuracy and compliance with every financial statement you draft. 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.

What is a Contra Account in Accounting? Types & Examples

A contra liability account is not classified as a liability, since it does not represent a future obligation. Most accountants choose to record the depreciation over the useful life of an item in the accumulated depreciation contra asset account, which is a credit account. The balance sheet would show the piece of equipment at its historical cost, then subtract the accumulated depreciation to reflect the accurate value of the asset. It is prepared when there is a reduction in the value of assets due to wear and tear continuous use or when we expect that a certain percentage of accounts receivable will not be received. Fixed assets like plants & equipment are depreciated every year, and this balance is transferred to the accumulated depreciation account. So, in this case, accumulated depreciation is a contra asset account related to plant & equipment.

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). Yes, contra asset accounts always have a credit balance, which is the opposite of a regular asset account. This credit balance reduces the overall value of the related asset account. That car is an asset because it has value and will be used to generate income.

• Choosing the right account ensures your financial statements reflect accurate values.
• Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.
• 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.
• This depreciation is saved in a contra asset account called accumulated depreciation.
• Each account in a general ledger will be designated debit or credit accounts depending on whether they’re categorized as assets, liabilities, revenues or expenses.

Sometimes, the current value of a note receivable will fall compared to its face value. This process will give rise to a contra asset account which is the discount on notes receivables. Regardless of that, allowance for receivables accounts will exist for all companies that have account receivable balances. This account helps companies present a more accurate accounts receivable balance on the financial statements. Accumulated depreciation is the most prevalent type of contra-asset account. It represents all the depreciation related to an asset or the company’s overall assets.

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• The use of a contra asset account when recording transactions allows a company to report the original amount and also report a reduction so that the net amount will also be reported.
• This account helps companies present a more accurate accounts receivable balance on the financial statements.
• Sometimes, the current value of a note receivable will fall compared to its face value.
• The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment.
• Managing these accounts correctly helps you make informed financial decisions and present a clear view of shareholder equity.

Contra Revenue Accounts

They typically appear just below the related asset, with their credit balances reducing the total value of the assets, showing the net amount that’s carried on the books. This presentation separates them from positive asset balances for clear visibility of the adjustments. To account for depletion, an Accumulated Depletion account is created so that it can serve as a contra account for the parent Fixed Asset account. By creating Accumulated Depletion account, companies can reflect the reduction of the natural resource asset and the overall depletion costs in a more accurate way. By properly managing depletion accounting, companies in these industries can better track and allocate the costs and value of their natural resources.

Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods. In this scenario, a write-down is recorded to the reserve for obsolete inventory. A Contra Asset Account is an asset account having a credit balance that is related to one of the assets with a debit balance. When we add the balances of two of these assets together, it reflects the net book value or carrying value of the debit balance assets. The accumulated depreciation will ultimately reduce the value of fixed assets when the two accounts are netted with each other. As a reminder, assets and expenses are debit accounts whereas liabilities and revenues are credit accounts.

Real-World Illustrations

Therefore, contra-asset accounts differ from other accounts that have a credit balance. An asset that is recorded as a credit balance is used to decrease the balance of an asset. This account is not classified as an asset since it does not represent a long-term value.

Types of Contra Accounts – Explanation

It is only prudent to show the reduction or reserve in a separate account, and at any point, it gives us the netbook value explaining what the actual cost was and how much of that has been depreciated. It also helps create reserves, and later any change in the expected number can be adjusted through allowances and reserves. 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. A business called Show-Fleur offers private driving tours of local botanical gardens — all from the comfort of high-end limousines. For its day-to-day operations, the business maintains a fleet of 75 identical 2016 Ford Explorer limousines, each initially retailing at $150 thousand.

A similar account can be found in the bookkeeping records if the business sells its products or provides services on a credit. Allowance for doubtful accounts allows management to account for a portion of the debt they assume will be uncollectible in their analysis and business plans. As mentioned, there can be a contra account for any type of transaction depending on a company’s needs.

Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock. From studying the basics of debit and credit, balance sheet accounts have a healthy balance. These accounts facilitate auditing and financial analysis by providing a detailed breakdown of adjustments made during a specific accounting period. This information assists auditors, and financial analysts in evaluating a company’s financial performance and risk exposure.

Properly documenting these contra accounts in your ledger can sometimes feel counter-intuitive since they operate in an opposite manner from their parent accounts. Consider an asset account, where the values are listed as debits, and the account itself will present a positive total. 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. These less-frequent contra accounts come into play when you need to account for changes in the outstanding liabilities for your business. For example, when your company borrows money, you would identify that debt in a Notes Payable account.

Provision for a discount from creditors and discount on bills receivable are other widely used examples. Rather than pay this cost up-front and tie up a significant chunk of capital, Show-Fleur makes this purchase on credit with a 90-day due date after invoicing. Fortunately, the seat vendor offered an early payment discount of 5%, meaning that when Show-Fleur paid off its full credit note within the first 30 days, it recouped $30 thousand in savings. Wanting to spruce up its aging inventory, Show-Fleur purchased new, climate controlled-seats for its fleet, delivering increased comfort for passengers and a cleaner, more modern look for vehicle interiors. The initial cost of this upgrade was $8 thousand per limo or $600,000 in total.

Contra equity accounts, therefore, act as a ledger for corporate strategy, impacting how the worth of a company is perceived from the outside. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. With increasing globalization and companies operating in many countries, the books of accounts must be compatible with a global platform.

Over time, the discount on bond payable balance is reclassified into bond interest expense. The issuer received less cash than the face amount of the bond, so the discount increases interest expense. Companies in the U.S. issued $1.3 trillion in bonds in 2023 alone, highlighting the importance of tracking these discounts properly. Contra asset accounts help companies record any reductions to their non-current contra asset account and current assets.

Although contra-asset accounts have credit balances, they do not appear in liabilities or equity. Usually, credit balances include items from one of those two natures. Far less common is the obsolete inventory reserve, which reduces the overall inventory value on the balance sheet. This contra account holds a reserve, similar to the allowance for doubtful accounts. For each debit against the inventory account, there will be a corresponding credit against the obsolete inventory contra account.

Bookkeepers use the contra asset account to track reductions to an asset separately from the asset itself. The use of a contra asset account when recording transactions allows a company to report the original amount and also report a reduction so that the net amount will also be reported. This way, the relationship between certain debits and credits can also be easily tracked. A contra asset account is added right after the asset account it is used to reduce, but before net assets on the Balance sheet. 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.