Contra Account Definition + Journal Entry Examples

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 delivery van is purchased by a business to use in delivering product and picking up materials. The company uses Straight-Line Depreciation to track contra expense account the loss of value of the asset over time. In this way, the historical cost, the amount of write-off, and the book value of an asset can always be seen on the balance sheet. When the original dollar amount is kept in the original account and a separate account is used for recording the deduction, the resulting financial information becomes more transparent and helpful for stakeholders.

Step-by-step guide on how to record contra revenue

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. You may want to first classify contra accounts as contra asset accounts, contra liability accounts, contra equity accounts, or contra revenue accounts before accounting for any transaction. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation.

• Accounts receivable is rarely reported on the balance sheet at its net amount.
• For example, we need to keep the face value of a bonds payable and the premium amount in separate ledger accounts even though both have credit balances.
• A contra asset is paired with an asset account to reduce the value of the account without changing the historical value of the asset.
• Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable.
• Contra liability accounts such as discount on bonds payable and discount on notes payable usually carry debit balances.

Contra equity

For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately. Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost. Showing contra assets on your balance sheet allows potential investors to see how you write-down a depreciable asset, such as a piece of equipment. Contra assets give investors a better picture of how you use your assets over time. Although the car is normally an asset because you can sell it for parts or use it for your business, when the car depreciates to a zero or negative balance, it is a contra asset on your balance sheet.

How to Record a Contra Account

If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement. Contra revenue accounts typically offset revenue accounts in a firm’s income statement.

• A doubtful debts contra account allows for future write-offs of accounts receivable.
• When the balance in the accumulated depreciation is $10,000 and your equipment account has a debit balance of $50,000, then the book value of your equipment is $40,000.
• Overall, while maintaining contra accounts may require additional effort, the benefits they offer in terms of financial transparency and accountability make them an essential tool in accounting.
• Simply hit Control + N under the Chart of Accounts or Edit, then click New (to create a new account).

Why should one include contra accounts on a balance sheet?

The revenue contra accounts Sales Returns, Discounts and Allowances are subtracted from the main Sales Revenue account to present the net balance on a company’s income statement. Generally in the financial statements the revenue account would be offset against the contra revenue account to show the net balance. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.

• Showing contra assets on your balance sheet allows potential investors to see how you write-down a depreciable asset, such as a piece of equipment.
• In your financial statements, contra revenue accounts appear as deductions from gross sales to arrive at net sales.
• When the company pays the cost of having the flyer printed, a journal entry is done.
• For example, it is not very useful to show the PPE cost account and the related accumulated depreciation account separately on the balance sheet.

Types of contra accounts