The most common contra type, contra assets, records the loss in value of any asset accounts listed in your general ledger. And by comparing these contras against their corresponding parent accounts, you can better understand the actual value of the assets retained by your business. Because contra asset accounts are used so frequently, it’s worth spending a little bit more time on them here, including common subtypes.
Non-current Liabilities
Including contra revenue accounts is important in the income statement because it shows the original amount of sales the firm has made, along with any factor that has reduced that amount. Both the asset and the corresponding contra asset accounts must be stated clearly in the balance sheet. https://accounting-services.net/ Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset’s net value or book value. In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000.
Contra liability accounts
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. This price gap — or discount — would then be recorded in a Discount on Notes Receivable account, and when the total of this contra account is combined with the parent account, you’ll be able to determine the net value of any outstanding notes.
Understanding a Contra Account
This presentation is rarely used, in favor of directly reducing the balance in the loan payable account and reporting the reduction as a gain on the income statement. In the above example, the debit to the contra liability account of $100 lets the company recognize that the bond was sold at a discount. The contra account will be a sub account of the expense account, and I will be manually entering the correcting journal entries. I’ll have to do it this way because the reimbursements were originally mis-catagorized as income, which violates GAAP. QB itself isn’t set up to handle something like this on its own, so manual entries is the only way I know of to take care of it.
What Is A Contra Asset Account?
Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting.
- The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock.
- Seldom used in practice a contra liability account is used for book value adjustments related to an asset or a liability.
- The sales will still show a sales credit on the profit and loss of 90,000, but there is also a contra returns account with a debit of 2,500.
- The combination of the balance in the adjunct account and the other general ledger account is the carrying amount or book value of the main account.
- An example of a contra liability account is the bond discount account, which offsets the bond payable account.
How Are Contra Accounts Reported in Financial Statements?
In other words, contra revenue is a deduction from gross revenue, which results in net revenue. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.
Wanting to spruce up its aging inventory, Show-Fleur purchased new, climate controlled-seats for its fleet, delivering increased comfort for passengers and a cleaner, more modern look for vehicle interiors. The initial cost of this upgrade was $8 thousand per limo or $600,000 in total. A business called Show-Fleur offers private driving tours of local botanical gardens — all from the comfort of high-end limousines. For its day-to-day operations, the business maintains a fleet of 75 identical 2016 Ford Explorer limousines, each initially retailing at $150 thousand.
Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset. Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. The credit balance in the liability account Bonds Payable minus sbh balance the debit balances in the contra-liability accounts Discount on Bonds Payable and Bond Issue Costs results in the carrying value or book value of the bonds. The credit balance in Notes Payable minus the debit balances in Discount on Notes Payable is the carrying value or book value of the notes payable. A debit will be made to the bad debt expense for $4,000 to balance the journal entry.
Contra Liability a/c is not used as frequently as contra asset accounts. It is not classified as a liability since it does not represent a future obligation. A liability that is recorded as a debit balance is used to decrease the balance of a liability. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value. Contra liability, equity, and revenue accounts have natural debit balances.
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. My Accounting Course is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R). In M&A transactions, such as a leveraged buyout (LBO), financing fees are another example of a contra liability.