What Is a Contra Account & Why Is It Important? Chron com

Contra revenue accounts reduce revenue accounts and have a debit balance. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra https://www.icsid.org/business/managing-cash-flow-in-construction-tips-from-accounting-professionals/ asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities include discount on notes or bonds payable.

Asset accounts usually have a positive value which is the same as a debit balance. You may not need to use contra asset accounts right now, but as your business grows, using contra asset accounts will likely become a necessity. If you offer credit terms to your customers, you probably know that not all of them will pay. Creating this contra asset account builds in a safeguard against overstating your accounts receivable balance.

Contra liability accounts

On the other hand, accumulated depreciation is a contra asset account. Sometimes, the current value of a note receivable will fall compared to its face value. This process will give rise to a contra asset account which is the discount on notes receivables. Regardless of that, allowance for receivables accounts will exist for all companies that have account receivable balances. This account helps companies present a more accurate accounts receivable balance on the financial statements. However, a contra asset account usually has a credit or nil balance.

Both the asset and the corresponding CA accounts must be stated clearly in the balance sheet. Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset’s net value or book value. Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts. This helps the firms to evaluate the book value of their assets and liabilities. The amount on the equity contra account is deducted from the value of the total number of outstanding shares listed on a company’s balance sheet. The balance in the allowance for doubtful accounts is used to find out the dollar value of the current accounts receivable balance that is deemed uncollectible.

An example of recording a contra asset

Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement. 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. Also, with IFRS asking to report it in a particular way, the accountants must be updated with recent changes to how the contra assets account should appear in the books of accounts. 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.

• If you keep a lot of inventory in stock, chances are that some of the inventory will become obsolete.
• A transaction is made under the sales return account when a customer returns a product to the company for a refund.
• 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.
• Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.
• These include white papers, government data, original reporting, and interviews with industry experts.
• This account only relates to a company’s intangible assets rather than tangible.

Key examples of contra accounts include accumulated deprecation and allowance for doubtful accounts. Contra asset accounts are necessary for real estate bookkeeping companies for various reasons. The most prominent of these include allowing companies to present a more accurate picture of their assets.