Contra Entry Journal

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. Contra equity is a general ledger account with a debit balance that reduces the normal https://accounting-services.net/ 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. The most common contra account is the accumulated depreciation account, which offsets the fixed asset account.

How to Calculate Units of Activity or Units of Production Depreciation

  1. This first criterion means that the car will have a net value or book value of $0 once it is fully depreciated.
  2. An example of contra equity with buying back shares or stock would be a company that has issued shares to the public.
  3. There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue.
  4. By viewing these accounts — the parent and contra — in tandem, business owners can gain broader insights, preserve the historical figures stored in the parent account, and make accommodations for any relevant changes.

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. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. These contra revenue accounts tend to have a debit balance and are used to calculate net sales. The contra liability account is less common than the contra asset account. An example of a contra liability account is the bond discount account, which offsets the bond payable account. A contra liability account is not classified as a liability, since it does not represent a future obligation.

Contra Asset Accounting & Examples

The company predicts which accounts receivable won’t be paid by customers and writes those off. When the account receivable is written off, it is added to bad debt expense on the income statement and placed in the contra account. If a company has a high or fast-growing allowance as a percentage of accounts receivable, keep a close eye on it. It could be growing with bad accounts, and cash flow will be affected. Contra expense accounts have a natural credit balance, as opposed to the natural debit balance of a typical expense account. Therefore, a contra expense account that contains a debit balance must have a negative ending balance.

Contra assets

The following are examples of commonly-used contra asset accounts you could create to better understand your business financials. However, it’s important to keep in mind that you can create any contra account you want to more clearly describe your business — this is not an exhaustive valuation and modelling or definitive list. Contra accounts play an important role in accounting by helping businesses track certain aspects of their finances more accurately. For example, contra revenue accounts can be used to track the full cost of sales less any discounts or returns.

Is a Contra Balance Negative or Positive?

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. For example, an asset was purchased by a company for $100,000 – that is, the historical cost of the asset was $100,000 – and its contra asset counterpart has a balance of $30,000. Therefore, the asset’s net value (or the book value) will be $70,000. Although they all aim at reducing the balance of some type of account, it is useful to have some general foundational knowledge of the different types of accounts.

We’ll need to dig into the footnotes to find out what the contra accounts are. 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. A contra asset account is an account in the balance sheet that offsets the balance of a regular asset account.

Bookkeeping

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. GAAP, the allowance for doubtful accounts represents management’s estimate of the percentage of “uncollectible” accounts receivable (i.e. the credit purchases from customers that are not expected to be paid). In other words, contra revenue is a deduction from gross revenue, which results in net revenue. GameStop’s stock never traded higher than $15.53 prior to the 2021 meme stock surge despite its more robust top and bottom lines prior to the pandemic. With automation of accounting using accounting software, these transactions are auto-posted into the relevant ledger and there is less relevance of cash book format discussed above.

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 the loss of value of the asset over time. This general structure can be applied across all contra types, so if the parent account has a credit, the contra account will have a debit. Similarly, if the parent account lists entries as debits, the contra account will appear as a credit.

In response, the firm should decrease its accounts receivable and revenue balances. That is done by crediting accounts receivable by $100 and debiting the contra revenue account sales returns and allowances for $100. Hence, the company will have gross revenue or net sales equal to $9,900. 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.

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. Angela Boxwell, MAAT, brings over 30 years of experience in accounting and finance. As the founder of Business Accounting Basics, she offers a wealth of free advice and practical tips to small business owners and entrepreneurs dealing with business finance complexities. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. Get instant access to video lessons taught by experienced investment bankers.

For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets. Assume that a company uses a contra expense account to record the amounts that employees paid toward the company’s health insurance costs. For instance, the company might debit its expense account 4210 Employee Health Insurance Expense when recording the insurance company’s invoice of $10,000. If the company withholds $2,000 from its employees’ wages to pay part of the cost of the insurance, the company will credit its contra expense account 4211 Employee Withholdings for Health Ins. A contra revenue account is a revenue account that is expected to have a debit balance (instead of the usual credit balance). In other words, its expected balance is contrary to—or opposite of—the usual credit balance in a revenue account.

There can be hidden value in stocks that have a lot of fully depreciated buildings. Companies like to depreciate assets as quickly as possible to get the tax savings, so the balance sheet may not state the true value of fixed assets. Allowance for doubtful accounts (ADA) is a contra asset account used to create an allowance for customers who are not expected to pay the money owed for purchased goods or services. The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables.

In its general ledger, the business will want to capture its gross sales figures and the actual value of the discount. Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete. Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods. In this scenario, a write-down is recorded to the reserve for obsolete inventory.