Contra Account Definition + Journal Entry Examples

Therefore, having them separate can ensure companies can track these changes easily. Contra accounts also allow companies to present the net value for these areas by reducing the original amount. This is because all related transactions are grouped together under one heading instead of being separated by category. They are useful for reducing the value of related accounts on financial statements. They’re also helpful because they simplify double-entry accounting by transforming multiple entries into one entry each time you use them—a process known as eliminating duplicates or eliminating reversal.

For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. A contra-liability account is a liability account in which the balance is expected to be a debit balance.

When the contra account reads $500 and the normal credit balance is $100,000, then your net sales are $99,500. This indicates that out of $100,000 sales, your customers return goods valued at $500. A contra account is a general ledger account that offsets the balance of a corresponding account with which it’s paired. If you debit the contra account, ensure that you offset the related account with a credit balance. In essence, contra accounts allow you to report your firm’s gross and net amounts. These accounts also ensure that you follow the matching principle in accounting, which states that you record expenses in the same period you incur them.

• In its general ledger, the business will want to capture its gross sales figures and the actual value of the discount.
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• When the company pays the cost of having the flyer printed, a journal entry is done.
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For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense. Accounts receivable is rarely reported on the balance sheet at its net amount. Instead, it is reported at its full amount with an allowance for bad debts listed below it. Maybe more accounting cycle steps explained importantly, it shows investors and creditors what percentage of receivables the company is writing off. 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.

Chart of Accounts Listing of Typical Contra Accounts:

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• Allowance for uncollectible accounts, or allowance for doubtful accounts, is one of the most common contra current asset accounts.
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Contra accounts are an essential component of the accounting process, designed to reflect the true value of assets, liabilities, equity, or revenue of a business. They provide a more nuanced picture of a company’s finances, allowing stakeholders to make informed decisions based on realistic, transparent financial information. 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. Allowance for uncollectible accounts, or allowance for doubtful accounts, is one of the most common contra current asset accounts. The dollar balance in the allowance for uncollectible accounts is the amount you don’t expect to collect, and this offsets the amount you report in accounts receivable.

Although you have not officially written off these debts yet, you show them to be a negative balance because you don’t believe the customer will pay you. 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. The reason you show a contra asset on a balance sheet is so you can see the overall net balance of a particular asset and to give investors a more accurate look into your company’s financial activity. At Invoiced, we provide a suite of solutions that work together to make managing your invoicing, accounts receivable, and accounts payable seamless and easy. To convert your invoice management efforts to an electronic format that can easily share data with other financial systems, businesses can leverage Invoiced’s E-invoice Network.

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Namely, within a ledger, each account is intended to contain transactions and balances of a similar type only. But sometimes, dissimilar transactions are important to consider together within a ledger. 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. A contra account is an account with a balance opposite the normal accounts in its category.

Contra Liability Accounts

Contra liabilities are those shown on the balance sheet but are not payable. For example, if a company has issued 10,000 shares of common stock at $10 per share, the contra liability would be $100,000. Are you interested in learning more about these accounts and how to manage them effectively? Here, we will discuss the basics of contra-liability accounts and provide tips for managing them in your business. We will also explore the different types of contra-liability accounts and the advantages and disadvantages of each. So, if you want to know what you need to know about contra-liability accounts, keep reading.

Terms Similar to Contra Liability Account

On the balance sheet, the net liability for the bonds payable will be reported as $980,000 ($1,000,000 – $20,000), reflecting the impact of the discount on bonds payable. The Notes Receivable account documents the total value of any promissory notes held by the company. Typically, these notes reflect purchases made on credit by your customers. To obtain a cash payout before the note reaches maturity, you can sell these notes to a bank or other financial institution for some price below the note’s face value. However, that $1.4 billion is used to reduce the balance of gross accounts receivable. Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount.

When the amount recorded in the contra revenue accounts is subtracted from the amount of gross revenue, it equals the net revenue of a company. In case a customer returns a product, the company will record the financial activity under the sales return account. The use of contra accounts ensures the accuracy of financial accounting records, as the value of the original accounts is not directly reduced. In the event that a contra account is not utilized, it can become increasingly troublesome to determine historical costs, which makes tax preparation time-consuming and difficult. The balance in the allowance for doubtful accounts is used to find out the dollar value of the current accounts receivable balance that is deemed uncollectible. These items decrease the liability balance on the paired liability account.

In M&A transactions, such as a leveraged buyout (LBO), financing fees are another example of a contra liability. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. The purpose of the Allowance for Doubtful Accounts is to track the reduction in the value of the asset while preserving the historical value of the asset. This includes the sales discount given to customers, which is typically a discount given in exchange for customers making early payments.

Liability Contra Account

A contra asset account is an account in the balance sheet that offsets the balance of a regular asset account. Make sure that you report contra accounts on the same financial statement as the related accounts. If you’re the one managing your company’s books of accounts, be sure to report the contra account on your financial statement on the line item directly beneath the main account. For example, if your business has accounts receivable of $50,000 and an allowance for doubtful debts account totalling $5,000, the net accounts receivable is $45,000. In this way, a contra asset (credit) lowers the overall value of your accounts receivables (debit) on the balance sheet.