He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, accounting and innovator in teaching accounting online.
How to Calculate Straight Line Depreciation
The purpose of a contra expense account is to record a reduction in an expense without changing the balance in the main account. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. 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. The business pays cash of 1,470 and records a purchase discount of 30 to clear the customers accounts payable account of 1,500. Contra Account is an opposite entry passed to offset the balances of related original accounts in the ledger and helps the organization retrieve the original amount and the amount of decrease in the value, thereby presenting the net balances of the account. It is linked to specific accounts and is reported as reductions from these accounts.
The contra account Purchases Discount has a normal credit balance.
- They typically appear just below the related asset, with their credit balances reducing the total value of the assets, showing the net amount that’s carried on the books.
- In other words, its expected balance is contrary to—or opposite of—the usual credit balance in a revenue account.
- Contra equity reduces the total number of outstanding shares on the balance sheet.
- This transaction is more fully explained in our purchases on account example.
- Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation.
Also, when products are returned, Sales Returns and Allowances—a type of contra revenue account—offset the previously recognized sales revenue. Such accurate record-keeping is vital for maintaining the integrity of your financial reports. When a contra asset account is first recorded in a journal entry, the offset is to an expense.
Bookkeeping
In the accounting general ledger, the credit balances of the contra purchase expense accounts reduce and offset the usual debit balances reported in the standard purchase expense accounts. Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount.
An estimate of bad debts is made to ensure the balance in the https://www.facebook.com/BooksTimeInc 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. By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes.
- The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible.
- From the table above it can be seen that assets, expenses, and dividends normally have a debit balance, whereas liabilities, capital, and revenue normally have a credit balance.
- Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance.
- When an account has a balance that is opposite the expected normal balance of that account, the account is said to have an abnormal balance.
- For instance, when a company buys back their own shares, they register them in a ‘Treasury Stock’ contra equity account, which reduces total shareholders’ equity.
- You could explore comprehensive webinars and workshops focused on the nitty-gritty of contra accounts.
- The contra account accounting reduces the total number of outstanding shares.
A Closer Look at Contra Revenue and Equity
A key example of contra liabilities includes discounts on notes or bonds payable. Purchase Discounts, Returns and Allowances are contra expense accounts with a credit balance that reduce the normal debit balance of the main Purchase Expense account in order to present the net value of purchase expenses in a company’s income statement. Discount on Bonds Payable is a contra liability account with a debit balance that reduces the normal credit balance of its parent Bonds Payable liability account in order to present the net value of payables on a company’s balance sheet. Contra equity is a general ledger account with a debit balance that reduces the normal contra expense account credit balance of a standard equity account to present the net value of equity in a company’s financial statements. Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. Obsolete, Unsold and Unusable Inventory are contra asset accounts with a credit balance that reduce the normal debit balance of the main Inventory asset account in order to present the net value of inventory on a company’s balance sheet.
What’s the Significance of a Contra Account in Business?
Examples of contra expense accounts include Purchase Returns, Purchase Discounts, and Advertising Reimbursements. The contra asset account Accumulated Depreciation is deducted from the related Capital Assets to present the net balance on the parent account in a company’s balance sheet. Contra equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock. Contra account accounting plays a crucial role in financial accounting by offsetting the balance of another account.
