Contra Account Explained

The difference between an asset’s account balance and the contra account balance is known as the book value. This type of account could be called the allowance for doubtful accounts or bad debt reserve. The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. She is an expert in personal finance and taxes, and earned her Master of Science in Accounting at University of Central Florida. Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers. The amount is not reported, and the net sales amount is reported on the income statement. In this way, the historical cost, the amount of write-off, and the book value of an asset can always be seen on the balance sheet.

The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. A contra asset account is an asset account with a natural credit balance. This account is paired with and offsets another asset account, so that a net balance is reported on the balance sheet. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts reduce accounts receivable, while accumulated deprecation is used to reduce the value of a fixed asset.

Contra Asset Account

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. The natural balance in a contra asset account is a credit balance, as opposed to the natural debit balance in all other asset accounts. There is no reason for there to ever be a debit balance in a contra asset account; thus, a debit balance probably indicates an incorrect accounting entry. When a contra asset transaction is created, the offset is a charge to the income statement, which reduces profits.

“Daybooks” or journals are used to list every single transaction that took place during the day, and the list is totaled at the end of the day. These daybooks are not part of the double-entry bookkeeping system. The information recorded in these daybooks is then transferred to the general ledgers, where it is said to be posted.

Contra equity

Allowance for doubtful accounts represents the percentage of accounts receivable a company believes it cannot collect. Allowance for doubtful accounts offsets a company’s accounts receivable account. 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. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset.

An allowance for doubtful accounts is a contra-asset account that reduces the total receivables reported to reflect only the amounts expected to be https://www.wave-accounting.net/ paid. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available.

What is the importance of Contra Accounts?

Again, the customer views the credit as an increase in the customer’s own money and does not see the other side of the transaction. Both the asset and the corresponding CA accounts must be stated clearly in the balance sheet. Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset’s net value or book value.

Here’s a short list of some example contra asset accounts and their corresponding asset accounts. Contra accounts are crucial in reducing the balance on the paired account. However, contra accounts allow them to track these transactions separately. Furthermore, these accounts are also crucial in allowing companies to record the original values for the paired accounts. A contra account is a balance sheet account that is used to offset a related asset, liability, or equity account.

Understanding contra accounts

Moreover, it is not considered while calculating the Company’s Earnings Per Share or dividends. Discount On Bonds PayableDiscount on bonds payable is the markdown value of a bond’s coupon rate or selling price compared to its market interest rate or fair value. The reduction in the sale price of a product due to quality defects or mistakes, in an effort to encourage the customer to keep a product with minor defects in exchange for the discount.

Whether reported as separate lines on the financial report or as a cumulative value, the net amount of the pair of accounts is called the “net book value” of the individual asset. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. A contra account is an account used in a general ledger to reduce the value of a related account. The first known recorded use of the terms is Venetian Luca Pacioli’s 1494 work, Summa de Arithmetica, Geometria, Proportioni et Proportionalita . Pacioli devoted one section of his book to documenting and describing the double-entry bookkeeping system in use during the Renaissance by Venetian merchants, traders and bankers. This system is still the fundamental system in use by modern bookkeepers. 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.”

How to Record a Sales Return for Accounting

The Profit and Loss Statement is an expansion of the Retained Earnings Account. It breaks-out all the Income and expense accounts that were summarized in Retained Earnings. The Profit and Loss report is important in that it shows the detail of sales, cost of sales, expenses and ultimately the profit of the company. Most companies rely heavily on the profit and loss report and review it regularly to enable strategic decision making. The Equity section of the balance sheet typically shows the value of any outstanding shares that have been issued by the company as well as its earnings.

• When one institution borrows from another for a period of time, the ledger of the borrowing institution categorises the argument under liability accounts.
• It is linked to specific accounts and is reported as reductions from these accounts.
• It is not classified as a liability since it does not represent a future obligation.
• The amount is reported on the balance sheet in the asset section immediately below accounts receivable.
• Contra accounts relate to all areas in the balance sheet, including assets, liabilities, and equity.