Contra Account Definition + Journal Entry Examples

Many or all of the products here are from our partners that compensate us. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. (centralpointeacademy.com) Robert Kelly is managing retail accounting director of XTS Energy LLC, and has more than three decades of experience as a business executive. He is a professor of economics and has raised more than $4.5 billion in investment capital.

The auditors aim to keep the balances at their adequate levels, but the controller might want to keep them as low as possible to reduce expenses and maximize profit levels. Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values. The Johnson family is expecting visitors for the holidays and will need to furnish the spare bedroom. They find a nice set at Homes Inc. that includes a queen size bed, dresser, nightstand, and luggage rack. They want to take advantage of the interest free year of credit, so on December 5th they open a store account for the entire balance of $7,500 and make arrangements for delivery of the queen size bedroom set. However, if the billing office stopped there, you would overstate your assets and net income.

Contra Accounts

This account serves two purposes — tracking total depreciation expenses while providing you with the accurate book value of the asset being depreciated. The decrease in the asset and accumulated depletion accounts reduces the balance to zero and removes the account from the balance sheet. Unlike https://www.icsid.org/business/managing-cash-flow-in-construction-tips-from-accounting-professionals/ a regular disposal of an asset, where the asset is abandoned and written off the accounting records, an asset disposal sale involves a receipt of cash or other proceeds. Bills payable or notes payable is a liability that is created when a company borrows any specific amount of money.

The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline. A contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit balance. The account offsets the balance in the respective asset account that it is paired with on the balance sheet. However, that $1.4 billion is used to reduce the balance of gross accounts receivable. Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount.

contra asset account

Treasury stock and drawing accounts are examples of contra equity accounts. Every contra asset account on a company’s accounting records will also have a pairing account. For example, accumulated depreciation will go along with related assets. Similarly, allowance for receivables will pair with accounts receivable balances. These balances cannot offset asset accounts that do not relate to them.

• Contra liability accounts are special accounts in the liabilities section of the balance sheet.
• A contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit balance.
• Contra revenue carries a debit balance and may be listed as sales discounts, sales returns, or sales allowances.
• The net accounts receivable will more accurately report your assets on the balance sheet, and the estimated uncollectible expense will recognize the reduction to income in the same period as the sale.
• Writing off your obsolete inventory in this manner allows you to expense the cost of the obsolete inventory while also decreasing your current inventory balance using the contra asset account.
• 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.

A contra liability acts more like an asset account because it is recorded as a debit and benefits the business’s bottom line by decreasing the liabilities. Examples of contra liability accounts include financing fees and original issue discounts . 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.