Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values. When researching companies, the financial statement is a great place to start. Home Depot also devotes footnote 4 to its share repurchase program and reports that the company is authorized by its board to repurchase $20 billion in shares. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.

What Is the Difference Between a Sales Return & a Sales Allowance?

Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable. They are used in case some customers won’t be able to pay the money they owe to the business. Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets. In case the contra asset account is not listed in the balance sheet, it must be listed what is a contra expense in the footnotes of the financial statement for the users to be informed. Note that in accounting, the term “book value” is also used interchangeably with net value. Therefore, the book value of an asset in the books is equal to its historical cost (the debit balance of the asset) minus the related amount of contra asset in the balance sheet (the credit balance of the contra asset).

Presentation of Contra Accounts

To oppose the revenue made by a company, contra revenue accounts must have a debit balance. Allowance for doubtful accounts is netted from the accounts receivable balance. The company predicts which accounts receivable won’t be paid by customers and writes those off.

What is the Effect of Contra Accounts to the Balance of Related (Paired) Account?

In double entry bookkeeping terms, a contra expense account refers to an account which is offset against an expense account. Inscrutable Corporation offers long-term disability insurance to its employees under an arrangement in which it pays for the insurance, and then participating employees reimburse it for half of this cost. In the first month of the arrangement, the company pays the insurer $10,000, which Inscrutable records in a long-term disability insurance expense account. It then records $5,000 of contra expense against this account, which is derived from deductions taken from employee pay.

What is a Contra Account? Definition

The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold. 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… The Allowance for Doubtful Accounts is used to track the estimated bad debts a company my incur without impacting the balance in its related account, Accounts Receivable. An estimate of bad debts is made to ensure the balance in the Accounts Receivable account represents the real value of the account. Allowance for Doubtful Accounts pairs with the Bad Debts Expense account when doing adjusting journal entries.

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.) Learn more about contra asset accounts. The most common contra type, contra assets, records the loss in value of any asset accounts listed in your general ledger.

Examples of revenue contra accounts are Sales Discounts, Returns and Allowances. The most common contra account is the accumulated depreciation account, which offsets the fixed asset account. Taken together, the asset account and contra asset account reveal the net amount of fixed assets still remaining. A contra asset account is not classified as an asset, since it does not represent long-term value, nor is it classified as a liability, since it does not represent a future obligation. 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.

Is a Contra Account a Debit or Credit?

• These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances.
• This depreciation is saved in a contra asset account called accumulated depreciation.
• A key example of contra liabilities includes discounts on notes or bonds payable.
• Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance.
• The difference between an asset’s account balance and the contra account balance is known as the book value.
• 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 portion of the account receivable that is estimated to be not collectible is set aside in a contra-asset account called Allowance for doubtful accounts. At the end of each accounting cycle, adjusting entries are made to charge uncollectible receivable as expense. Allowance for uncollectible accounts, or allowance for doubtful accounts, is one of the most common contra current asset accounts.

• The most common contra type, contra assets, records the loss in value of any asset accounts listed in your general ledger.
• As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find.
• When the two balances are offset against each other they show the net balance of both accounts.
• The company’s income statement will report the combination of the amounts in accounts 4210 and 4211 in order to show the company’s actual expense of $8,000 ($10,000 minus $2,000).
• Contra accounts are confusing at first, but, with a little study, understanding them becomes second nature.
• The contra liability account is less common than the contra asset account.

The dollar balance in the allowance for uncollectible acounts is the amount you don’t expect to collect, and this offsets the amount you report in accounts receivable. A contra asset account is an account in the balance sheet that offsets the balance of a regular asset account. 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. Companies like to depreciate assets as quickly as possible to get the tax savings, so the balance sheet may not state the true value of fixed assets. A contra account is an account with a balance opposite the normal accounts in its category.

Contra accounts definition

Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset. Each year of an asset’s life, another year of Depreciation Expense is recorded. The offset to the Depreciation Expense account is Accumulated Depreciation. Contra expense accounts are rarely used, because organizations find it to be easier to record third-party payments directly against an expense account. However, these accounts are still useful when dealing with large quantities of reimbursements, where it is cleaner and less confusing to store the information in a separate account. Thus, the use of a separate contra expense account makes it easier to monitor the flow of expenses and reimbursements.