In this scenario, a write-down is recorded to the reserve for obsolete inventory. Contra liabilities are common in companies that sell bonds to raise capital. 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. 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.

Contra accounts are worth a look

Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Offsetting the asset account with its respective contra asset account shows the net balance of that asset. A contra asset is paired with an asset account to reduce the value of the account without changing the historical value of the asset. Examples of contra assets include contra expense account Accumulated Depreciation and Allowance for Doubtful Accounts. Unlike an asset which has a normal debit balance, a contra asset has a normal credit balance because it works opposite of the main account. Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance.

contra account definition

The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount. This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms. Most accounts receivable would just be the time between purchase and credit card settlement. Accruing tax liabilities in accounting involves recognizing and recording taxes that a company owes but has not yet paid. This is important for accurate financial reporting and compliance with…

What is Accumulated Depreciation?

• This is an owner’s equity account and as such you would expect a credit balance.
• Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement.
• Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset.
• Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period.

Assume that a company uses a contra expense account to record the amounts that employees paid toward the company’s health insurance costs. For instance, the company might debit its expense account 4210 Employee Health Insurance Expense when recording the insurance company’s invoice of $10,000. If the company withholds $2,000 from its employees’ wages to pay part of the cost of the insurance, the company will credit its contra expense account 4211 Employee Withholdings for Health Ins. The contra asset account, accumulated depreciation, is always a credit balance. This balance is used to offset the value of the asset being depreciated, so as of September 1, your $8,000 asset now has a book value of $7,866.67. As such, for an asset or expense account that is naturally a debit account, the contra accounts will be in a credit position.

• Contra revenue accounts reduce revenue accounts and have a debit balance.
• In other words, the contra liability account is used to adjust the book value of an asset or liability.
• Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance.
• To put it another way, 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.
• Companies bury them in the footnotes and often don’t break out the actual calculation.

The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable. Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000. Discount on Bonds Payable is a contra liability account with a debit balance that reduces the normal credit balance of its parent Bonds Payable liability account in order to present the net value of payables on a company’s balance sheet. Purchase returns, allowances and discounts are all examples of contra expense accounts. The accounts normally have a credit balance and in use are offset against the purchases account which is normally a debit balance.

Likewise, when you pay a bill, your cash account is reduced (credited) because you’re lowering the balance. As a reminder, assets and expenses are debit accounts whereas liabilities and revenues are credit accounts. One other type of account is the contra account and for accountants, this is a must-know. 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.

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. 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.

For example, when your company borrows money, you would identify that debt in a Notes Payable account. Furthermore, if you subsequently pay off that debt early and capture a discount, the contra liability account — Discount Notes Payable — would record those savings. Another common contra liability account is a Discount on Bonds Payable account used by businesses that issue their own bonds. Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value. For example, GAAP accounting (or generally accepted accounting principles) requires fixed assets to be reported at cost on the balance sheet, but, over time, that value depreciates as the assets are used. The balance sheet will show a gross fixed assets value, a contra account value for accumulated depreciation, and a net value.

• Contra asset accounts are recorded with a credit balance that decreases the balance of an asset.
• This is important for accurate financial reporting and compliance with…
• Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees.
• Master accounting topics that pose a particular challenge to finance professionals.
• Contra Equity Account – A contra equity account has a debit balance and decreases a standard equity account.

What is a Contra Revenue Account?

The company uses Straight-Line Depreciation to track the loss of value of the asset over time. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts. There is the existence of contra accounts in accounting which are accounts that have the purpose of decreasing the value of another specific account if the two accounts are netted or summed together.

• For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
• Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset.
• Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance.
• In the financial statements the purchases account would be offset against the contra expense accounts to show the net purchases.
• Revenue is an income statement account, but it flows through to the equity section of retained earnings as well.
• If we record depreciation expense in the cost accounts directly, we will lose key information about the original cost of the assets and accumulated depreciation.