Contra Account: A Complete Guide + Examples Xero accounting

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. You may use accounting software packages, such as QuickBooks Online to set up contra accounts. Simply hit Control + N under the Chart of Accounts or Edit, then click New (to create a new account). With contra equity accounts, you reduce the number of outstanding shares you list on your company’s balance sheet. Treasury stock and owner’s drawing account are examples of contra equity accounts. A contra-liability account is one that is debited in order to offset a credit to another liability account.

• Journal entry item related to contra liability account can possibly be identified with the often used word “discount”.
• We will also explore the different types of contra-liability accounts and the advantages and disadvantages of each.
• The list of asset accounts on your general ledger and balance sheet conveys the combined, potential value of all of the tangible and intangible items that your organization possesses.
• However, these vehicles have experienced significant wear and tear in the intervening years.
• The term “contra account” is used in accounting and finance to describe an account that’s a mirror image of another.

When netted together, the two accounts yield the carrying value of a bond. The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline. A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity). The purpose of a contra expense account is to record a reduction in an expense without changing the balance in the main account. Contra accounts are crucial in reducing the balance on the paired account. However, contra accounts allow them to track these transactions separately.

Do Contra Accounts Have Debit or Credit Balances?

In bookkeeping, a contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit (negative) balance. The account offsets the balance in the respective asset account that it is paired with on the balance sheet. Bills payable or notes payable is a liability that is created when a company borrows any specific amount of money. If the company repays the loan early, the lender may provide a discount. This discount is subtracted from the total amount borrowed to better reflect the discount given by the lender.

• A contra account relates to a specific area in the balance sheet that includes a negative balance.
• Examples of a contra revenue accounts include sales returns, sales discounts, and sales allowances.
• The amount in the accumulated depreciation account is deducted from the assets of a company, such as buildings, vehicles and equipment.
• Consider a business that offers an early payment discount to its customers, cutting their invoiced total by 3% if they pay within 1 week of invoicing.

So rather than adjusting your Inventory account, you would update its contra account — Obsolete Inventory. There is almost always a story behind data; a clarification or historical insight that changes the meaning behind raw figures. In a report, layering on that additional context can be easy, but in a general ledger, you have few options for conveying nuance and subtlety.

Contra asset account example

The amount on the equity contra account is deducted from the value of the total number of outstanding shares listed on a company’s balance sheet. Contra account is important as it not only allows a company to report the original amount of a transaction but also report any reductions that may have happened so that the net amount will also be reported. They are useful in preserving the historical value in the main account while presenting a write-down or decrease in a separate contra account that nets to the current book value. These less-frequent contra accounts come into play when you need to account for changes in the outstanding liabilities for your business. For example, when your company borrows money, you would identify that debt in a Notes Payable account.

What is Contra Account? – Definition, Types, Benefits

Examples include accumulated depreciation, sales returns and allowances, and contra equity accounts like treasury stock. Contra equity accounts are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds. Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances. In a sales returns and allowances contra revenue account, you offset the balance in the sales revenue account.

How to Record and Report Contra-Liability Accounts on Financial Statements

However, some asset accounts need a negative counterpart to reduce the balance of that account. The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. 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. Contra-liability accounts differ from other types of accounts in that they have a debit balance instead of a credit balance.

Contra liabilities are lower liability accounts and have a debit balance. For example, if a company has a $1,000 credit balance in its Accounts Payable account, it may create a contra liability account called Accounts Payable Offset. This account would have a $1,000 credit balance, offsetting the Accounts Payable account's balance. The discount on bonds payable amount shows the difference between the amount of cash received when issuing a bond and the value of the bond at maturity. The allowance method of accounting enables a company to determine the amount reasonable to be recorded in the contra account. When recording assets, the difference between the asset’s account balance and the contra account balance is the book value of the asset.

Contra Account: Definition, Types & Examples

At the same time, our Accounts Receivable Automation software and Accounts Payable Automation software makes tracking, managing, and processing crucial assets and liabilities — and their contras — easier than ever before. A contra expense account is an account used to reduce bookkeeping training programs the amount of an expense without changing the balance in the main expense account. Examples of contra expense accounts include Purchase Returns, Purchase Discounts, and Advertising Reimbursements. Accumulated Depreciation is a contra asset that pairs with Fixed Assets.