Contra accounts definition

contra expense

Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000. Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement. Examples of revenue contra accounts are Sales Discounts, Returns and Allowances. A liability that is recorded as a debit balance is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as contra asset accounts.

  • 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.
  • This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000.
  • Hence, the company will have gross revenue or net sales equal to $9,900.
  • Allowance for doubtful accounts is netted from the accounts receivable balance.
  • Sometimes, we have an ancillary balance whose normal balance is the same as that of the parent account.

What is the Difference Between a Contra Account and an Adjunct Account?

We are better off subtracting the accumulated depreciation account (the contra account) from PPE cost account (the parent account) to arrive at the net balance of the PPE. As mentioned, contra asset accounts are usually listed below their matching asset accounts, and the net values of those assets are written next to the contra accounts. The equity section of the contra account balance sheet is where the shareholder’s claims to assets are reported. The main contra equity account is treasury stock, which is the balance of all stock repurchased by the company. When a company repurchases shares, it increases the fractional ownership of all remaining shareholders. Companies that issue bonds are likely to use contra liability accounts.

FAR CPA Practice Questions Explained: Adjusting a Statement of Cash Flow to Correct Errors

contra expense

Contra asset accounts have a balance that is opposite from the regular asset accounts. In other words, a contra asset account maintains a credit balance instead of a debit balance. To oppose the revenue made by a company, contra revenue accounts must have a debit balance.

Contra Accounts: Explained, Popular Types and Examples

contra expense

The auditors aim to keep the balances at their adequate levels, but the controller might want to keep them as low as possible to reduce expenses and maximize profit levels. Taking the example of CCC again, the company has $50,000 in accounts receivable at year-end of December 31. CCC estimates that 5% of accounts receivable will most likely be unrecoverable. In footnote 3, the company reports, “Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021.”

contra expense

Example of a contra account

Unlike an asset which has a normal debit balance, a contra asset has a normal credit balance because it works opposite of the main account. A second example of a contra asset account is Accumulated Depreciation. For the purpose of presentation on primary financial statements, we are often concerned only with the net figure of two similar classes/balances which we determine by subtracting one account from the another. For example, it is not very useful to show the PPE cost account and the related accumulated depreciation account separately on the balance sheet.

The main reason is to make the remaining shares more valuable, as their prices are expected to rise after the stock buyback. Home Depot also devotes footnote 4 to its share repurchase program and reports that the company is authorized by its board to repurchase $20 billion in shares. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer.

contra expense

  • When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value.
  • In the first month of the arrangement, the company pays the insurer $10,000, which Inscrutable records in a long-term disability insurance expense account.
  • The difference between an asset’s balance and the contra account asset balance is the book value.
  • A contra expense is an account in the general ledger that is paired with and offsets a specific expense account.
  • They are used in case some customers won’t be able to pay the money they owe to the business.

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. It carries a credit balance and is linked to the fixed asset account, which carries a debit balance. The accumulated depreciation account is designed to reduce the carrying value of the fixed asset account when depreciation is recorded at the end of each period.

Contra expense accounts play a crucial role in financial accounting, offering a nuanced way to track and report reductions in expenses. These accounts are essential for providing a more accurate picture of an organization’s financial health by offsetting specific costs. For example, if the balance of accumulated depreciation increases from $20,000 to $50,000, this means that the depreciation expense amounts to $30,000, which will be listed in the income statement. Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost. The definition can be expanded to include contra accounts in general.

  • The difference between an asset’s account balance and the contra account balance is known as the book value.
  • In this example, the contra expense account (Purchase Discounts) is used to provide a more accurate and detailed representation of the company’s expenses, allowing for better financial analysis and decision-making.
  • Asset accounts usually have a positive value which is the same as a debit balance.
  • Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances.
  • Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

Asset Contra Account

contra expense

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