As mentioned, a company will usually have debit balances in its asset accounts. While accumulated depreciation is the most common contra asset account, the following also may apply, depending on the company. A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger. 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.
What is a Contra Account?
An accumulated depreciation account is a type of contra asset account that is used for recording the amount of depreciation a fixed asset evolves through. For instance, a fixed asset such as machinery, a company building, office equipment, vehicles or even office furniture would be highlighted in an accumulated depreciation account. This amount may appear on a company’s balance sheet, and it can ultimately result in a reduction in the gross amount of a business’s fixed assets.
The purpose of a contra asset account is to offset the asset account and show a reserved amount that reduces the balance of the corresponding asset account. The balance in a contra asset account allows the accountant, tax preparer, or other end-user to know how much to subtract from the paired asset’s value. You use contra revenue accounts to record sales returns, allowances, and discounts. If a customer returns a product due to defects or dissatisfaction, you record the refund in a contra revenue account instead of adjusting the original net sales figure.
How Contra Asset Accounts Work
These include accumulated depreciation, accumulated amortization, allowance for receivables, obsolete inventory, and discount on notes receivables. Revenues do not appear on the balance sheet but are listed as part of the income statement. Some accounting professionals use contra revenue accounts to adjust gross receipts and calculate net revenue. Contra revenue carries a debit balance and may be listed as sales discounts, sales returns, or sales allowances. The owner’s equity is calculated by subtracting liabilities from the business’s assets. Contra equity accounts reduce the total amount of the owner’s, or shareholders’, equity.
What is a contra asset account?
While equity accounts typically appear on the balance sheet as a credit balance, the contra equity accounts have a debit balance. Assets, or what is owned by the business, are recorded in a company’s general ledger and appear on the balance sheet. Assets appear with a positive balance because they are recorded as a debit to the account. A negative balance, or credit entry, in an asset account, usually indicates a mistake or is accompanied by an explanation. Contra assets are a rare exception as they are recorded as a credit balance and appear as a negative number.
Step 3: Categorize your assets and liabilities
Allowance for receivables is an account that companies maintain to record possible bad debts. 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.
What is a Contra Asset Account
- Because contra asset accounts are used so frequently, it’s worth spending a little bit more time on them here, including common subtypes.
- You use contra revenue accounts to record sales returns, allowances, and discounts.
- To properly account for this scenario in their books, the company must record the gross sales figure (which is the total sales revenue) and the value of the discount on early payments.
Contra asset account is an important element of the balance sheet or the books of accounts. This is because it tallies two respective debit-credit entry pairs, thereby figuring out the net balance of the asset account. Regular reconciliation ensures your contra accounts match actual transactions. This helps you avoid errors, detect fraud, and stay compliant with GAAP (Generally Accepted Accounting Principles). Contra equity accounts help you maintain transparency and comply with GAAP. Investors and auditors review these accounts to assess your company’s financial position.
For example, accumulated depreciation where do contra assets go on a balance sheet is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets. Treasury stock is a contra equity account that is entered as a negative value on the balance sheet of public companies. It shows the amount of funds used to repurchase previous issuances of stock, reducing the total number of shares outstanding. Original issue discounts (OID) are a type of contra liability like financing fees because they are also amortized over a loan’s term and reduce pre-tax income. The purpose of recording OID as a contra account is to quickly show the difference between the redemption price and the discounted offering price of debt.
- And by comparing these contras against their corresponding parent accounts, you can better understand the actual value of the assets retained by your business.
- This attachment is necessary since it functions hand-in-hand with a debit balance to fully disclose the total value of an asset and how much is its value with respect to time and other important variables.
- When you manage contra accounts correctly, your reports stay transparent, accurate, and compliant with accounting standards.
It is a reduction from equity because it represents the amount paid by a corporation to buy back its stock. The contra account accounting reduces the total number of outstanding shares. The treasury stock account is debited when a company buys back its shares from the open market.