What Is a Contra Account? The Motley Fool

account balance

A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity). A contra liability account is a liability account that is debited in order to offset a credit to another liability account.

  • Describe what accounts are considered liability and asset accounts.
  • In general, accounts receivable are converted into cash within the operating cycle.
  • If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming.
  • Usually, credit balances include items from one of those two natures.

The difference between an asset’s balance and the contra account asset balance is the book value. 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. A contra liability is an account in which activity is recorded as a debit balance is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as contra asset accounts.

How are Contra Accounts Used and Reported?

Equity and liability accounts both have contra accounts as well. Expense accounts are technically contra equity accounts because they are linked to another equity account, revenue, and maintain an opposite balance. Regular equity accounts, like revenue, maintain a credit balance. The expense account uses its debit balance to reduce the revenue account’s credit balance. The contra revenue accounts commonly used in small-business accounting include sales returns, sales allowance and sale discounts.

  • By stating this information separately in a contra asset account, a user of financial information can see the extent to which a paired asset should be reduced.
  • Provision for a discount from creditors and discount on bills receivable are other widely used examples.
  • The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets.
  • Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting.
  • There are several examples of contra accounts, including accumulated depreciation, accumulated depletion, accumulated amortization, allowance for receivables, etc.
  • For her businesses, Nora is responsible for finances, marketing, operations, and fundraising.

https://bookkeeping-reviews.com/ Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. Another contra asset account is Allowance for Doubtful Accounts. This account appears next to the current asset Accounts Receivable.

What is a Contra Account? Definition

In other words, a contra asset account maintains acredit balance instead of a debit balance. The same is true for other asset accounts like accounts receivable. Accounts receivable is rarely reported on the balance sheet at its net amount.

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Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. The amount is reported on the balance sheet in the asset section immediately below accounts receivable. The net of these two figures is typically reported on a third line. It can retire the shares, meaning that they will no longer be existent on the company’s financial statements as treasury stock. They can present more information about the assets and liabilities of the company.

Contra equity

The journal entry will credit the asset’s account balance and debit the balance in the accumulated depletion account. Prior to zeroing out their account balances, these accounts should reflect the updated depreciation expense computed up to the disposal sale date. Accrued assets are assets, such as interest receivable or accounts receivable, that have not been recorded by the end of an accounting period. An impairment cost must be included under expenses when the carrying value of a non-current asset on the balance sheet exceeds the asset’s market value subtracted by any transaction costs . Contra asset accounts are necessary for companies for various reasons. The most prominent of these include allowing companies to present a more accurate picture of their assets.

Is a contra asset account a debit or credit?

A contra asset account is an asset account where the account balance is a credit balance. It is described as "contra" because having a credit balance in an asset account is contrary to the normal or expected debit balance. (A debit balance in a contra asset account will violate the cost principle.)

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