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. When a company repurchases shares, it increases the fractional ownership of all remaining shareholders. Contra Asset Account – A contra asset account is an asset that carries a credit contra revenue account balance and is used to decrease the balance of another asset on the balance. 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 or definitive list.
- A contra liability account is not classified as a liability, since it does not represent a future obligation.
- These less-frequent contra accounts come into play when you need to account for changes in the outstanding liabilities for your business.
- Focusing on these areas can help your business not only survive, but thrive, in today’s competitive market.
- This indicates that out of $100,000 sales, your customers return goods valued at $500.
- Examples of contra assets include Accumulated Depreciation and Allowance for Doubtful Accounts.
Example of a contra account
As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find. Companies bury them in the footnotes and often don’t break out the actual calculation. Still, it is important when possible to consider how the net accounts are calculated and be wary of companies that are reporting a ton of bad debts. The contra equity account treasury stock is reported right on the balance sheet. Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period.
Understanding a Contra Account
- A debit will be made to the bad debt expense for $4,000 to balance the journal entry.
- The use of a contra account allows a company to report the original amount and also report a reduction so that the net amount will also be reported.
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- Contra accounts such as these have a debit balance and are deducted from the total amount of a company’s revenue.
- In double entry bookkeeping terms, a contra revenue account or contra sales account refers to an account which is offset against a revenue account.
- Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance.
Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities includes discounts on notes or bonds payable. There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra accounts are more commonly paired with asset accounts, such as accounts receivable or inventory, to reduce the carrying values of those assets.
How to Present Contra Accounts on Financial Statements
Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts. In other words, contra accounts are used to reduce normal accounts on the balance sheet. The hottest retail item of today can be relegated to nostalgia channels on YouTube tomorrow.
How Does a Contra Account Work in Accounting?
If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming. You can also record contra revenue within the sales account, but this means that it will be buried within the total amount of revenue reported, so that management cannot easily determine the amount of contra revenue. If your company has minimal contra revenue activity, it is acceptable to record these transactions within the revenue account. A contra account is an account with a balance opposite the normal accounts in its category.
Sales Allowances
A liability that is recorded as a debit balance is used to decrease the balance of a liability. It is not classified as a liability since it does not represent a future obligation. Including contra accounts on a balance sheet is important as it allows for a more transparent view of a company’s financial position. Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value.
If a company has a high or fast-growing allowance as a percentage of accounts receivable, keep a close eye on it. When a contra asset account is first recorded in a journal entry, the offset is to an expense. 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.
FAQ: Understanding Contra Revenue
What Is the Benefit of Using a Contra Account?
