Types of Contra Accounts List of Examples Explanations Definition

CCC bought equipment and machinery worth $100,000 at the beginning of the current financial year and estimates that the equipment and machinery will depreciate by $10,000 every year. The purpose of the Accumulated Depreciation account is to track the reduction in the value of the asset while preserving the historical cost of the asset. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.

Contra account examples

A liability that is recorded as a debit balance is used to decrease the balance of a liability. It is not classified as a liability since it does not represent a future obligation. Including contra accounts on a balance sheet is important as it allows for a more transparent view of a company’s financial position. Or, if the contra liability account balance is immaterial, the accounting staff could elect not to keep a balance in the account at all. When the amount is material, the line item is typically presented separately on the balance sheet, below the liability account with which it is paired.

What is a Contra Liability?

For its day-to-day operations, the business maintains a fleet of 75 identical 2016 Ford Explorer limousines, each initially retailing at $150 thousand. However, these vehicles have experienced significant wear and tear in the intervening years. And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand. The OID is calculated as the difference between the redemption price and the discounted issuance price. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.

How Does a Contra Account Work in Accounting?

For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance. 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. 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.

For example, when a line item on your balance sheet presents the balance of accounts receivable, report the value of allowance of uncollectible accounts below the accounts receivable line. Be sure to enter the contra account on the opposite column of the account they’re offsetting. If contra assets appear in the credit column, record contra liabilities on side. For instance, when a company records a rebate in a contra expense account, the net expense reported on the income statement is reduced. This reduction can lead to a more favorable view of the company’s profitability, as it shows that the company is effectively managing its costs. Additionally, the use of contra expense accounts can impact key financial ratios, such as the operating margin and net profit margin, by presenting a more accurate measure of the company’s financial performance.

• Contra Equity Account – A contra equity account has a debit balance and decreases a standard equity account.
• By clearly delineating reductions in expenses, these accounts help to avoid the potential for overstating costs.
• The sales allowance shows the discounts given to customers when returning the product.
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• For instance, if a company has a plant asset such as Equipment with a debit balance of $92,000 and the account Accumulated Depreciation has a credit balance of $50,000, the carrying amount (or book value) of the equipment is $42,000.
• For example, a grocery store displays advertisements for a national brand in its weekly flyer.

Accounting software can simplify the management of and reporting from your ledger. With the appropriate level of automation integration in your chosen tool, you can pull the relevant values into these individual accounts directly from invoices, credit agreements, and other documentation. Rather than pay this cost up-front contra expense account and tie up a significant chunk of capital, Show-Fleur makes this purchase on credit with a 90-day due date after invoicing. Fortunately, the seat vendor offered an early payment discount of 5%, meaning that when Show-Fleur paid off its full credit note within the first 30 days, it recouped $30 thousand in savings.

For example, we need separate accounts to hold the actual cost of property, plant and equipment (PPE) and related accumulated depreciation. If we record depreciation expense in the cost accounts directly, we will lose key information about the original cost of the assets and accumulated depreciation. To avoid this loss of important data, we record actual cost and depreciation in separate ledger accounts. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. In other words, contra revenue is a deduction from gross revenue, which results in net revenue.

How are Contra Accounts Used and Reported?

• Namely, within a ledger, each account is intended to contain transactions and balances of a similar type only.
• Contra accounts are used to reduce the original account directly, keeping financial accounting records clean.
• The amount in allowance for doubtful accounts is deducted from the accounts receivable account of a company.
• Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean.
• It also shows the carrying (net) amount of $19,000, which you report to your firm’s balance sheet.