To offset this, the allowance for doubtful accounts balance is adjusted via a credit, while the bad debt account is debited to balance out the AR account. When combined, the AR account and the allowance for doubtful accounts contra assets offer a projection of how much net cash is expected to be received from outstanding accounts. 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. The most common contra equity account is called “treasury stock.” This special account decreases the number of shares outstanding in the market because the company repurchases some of the shares from its buyers.
Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement. Contra revenue accounts typically offset revenue accounts in a firm’s income statement. Contra liability accounts are less commonly used than contra asset accounts.
For example, an asset was purchased by a company for $100,000 – that is, the historical cost of the asset was $100,000 – and its contra asset counterpart has a balance of $30,000. Although they all aim at reducing the balance of some type of account, it is useful to have some general foundational knowledge of the different types of accounts.
The net value of both these figures is usually reported on a third line. A contra liability account is the lesser known type of a contra account. The most known type of a contra asset account what is a contra asset is the Accumulated Depreciation which reduces the amount of Fixed Assets. Accumulated depreciation is the total amount of depreciation expense a company has recorded for an asset.
Contra Account Definition: Types and Example
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A contra account is an account whose balance is the opposite of a corresponding account. In finance, a contra account reduces the value of related or corresponding account. It offsets the balance of the related account, which means when the corresponding account is positive, a contra account will be negative. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. Key examples of contra accounts include accumulated deprecation and allowance for doubtful accounts.
Contra Asset, Contra Liability and Contra Equity
A debit balance is a net amount often calculated as debit minus credit in the General Ledger after recording every transaction. The difference between an asset’s account balance and the contra account balance is known as the book value. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account. Bills payable or notes payable is a liability that is created when a company borrows any specific amount of money. If the company repays the loan early, the lender may provide a discount. This discount is subtracted from the total amount borrowed to better reflect the discount given by the lender.