Companies that issue bonds are likely to use contra liability accounts. If the bond is sold at a discount, the company will record the cash received from the bond sale as “cash”, and will offset the discount in the contra liability account. The benefit of using the contra expense account is that the company’s managers can see in account 4210 the total amount that the company paid to the health insurance company. Then in account 4211 they can see the portion of the cost that was paid by the employees. The company’s income statement will report the combination of the amounts in accounts 4210 and 4211 in order to show the company’s actual expense of $8,000 ($10,000 minus $2,000).

The allowance for doubtful accounts is a contra asset because it reduces the value of the accounts receivable (AR) account on the general ledger. Often when a company extends goods on credit, management expects some of those customers not to pay and so anticipates writing off bad debt. A contra account always offsets the balance of a corresponding account. Any entry made to contra accounts is presented on a company’s balance sheet under the paired 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.

Example of the Journal Entry and Impact

Here ‘Accumulated Depreciation’ is a contra account and following are the journal entries to be recorded in the books of accounts for first year to account depreciation. Contra accounts allow you to show the amounts that offset a paired related account. As a small business owner, understanding how to set up contra accounts enables you to prepare and maintain accurate financial records. A contra account is where we record events that are contrary to a general ledger parent account, also called a relating account.

• All of this information is reported on the balance sheet so that it is easier for the readers to understand the financial position of the company.
• This contra account holds a reserve, similar to the allowance for doubtful accounts.
• Overall, contra accounts are offsetting balances that are the opposite of specific accounts.
• Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts.
• A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger.

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. For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. Now that you have understood the contra account definition, you can summarize that contra account will always have a credit balance which will offset with paired asset account.

Contra revenue accounts

The two most common contra accounts on a balance are accumulated depreciation and the allowance for doubtful debts. Accumulated depreciation tallies the depreciation to date of a fixed asset, such as a car or a building. The purpose of a contra account is to accurately offline accounting software freeware report value of operating performance and assets for a firm. A contra account is an account that records events like adjustments and transactions that are having an opposite effect on a relating account’s true value on the firm’s financial statements.

When a company repurchases shares, it increases the fractional ownership of all remaining shareholders. By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount. Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset. Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement. For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets.

Benefits of Contra Accounts

You can use contra accounts to record the goods your customers return, inventory that gets damaged, and equipment depreciation. The equity section of the 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.

• In the realm of accounting, various techniques are used to ensure financial statements provide an accurate and comprehensive view of a company’s financial health.
• This represents the cumulative amount of depreciation expense charged against an asset.
• A contra account is a negative account that is netted from the balance of another account on the balance sheet.

The bond is listed on the balance sheet at the full amount of $1,000, but the cash received is just $950, so a contra liability for the discount is listed to make the entry balance. While accumulated depreciation is the most common contra asset account, the following also may apply, depending on the company. A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger. Sometimes, the current value of a note receivable will fall compared to its face value.