4 Feb

What is a Contra Account? Types & Examples Explained

By doing so, they can bring their asset accounts to a more accurate position. Instead, the existence of contra-asset accounts for companies will differ based on a company’s requirements. This account offsets the balance in the respective asset account that they pair with on the balance sheet. It is linked to specific accounts and is reported as reductions from these accounts. As we saw in the car example, this account tracks the total depreciation of an asset over its useful life.

A contra asset account is an asset account with a natural credit balance.
Fixed assets like plants & equipment are depreciated every year, and this balance is transferred to the accumulated depreciation account.
On the balance sheet, subtract contra assets from total assets and adjust liabilities using contra liability accounts.
In reality, the actual number of company discounts came closer to $2 thousand.
The filter (your contra asset account) holds back what’s no longer useful, so what you’re left with is the good stuff—the net value.
Contra equity accounts help you maintain transparency and comply with GAAP.

Real-World Illustrations

Contra asset accounts also help companies keep their general ledgers organized. By recording reductions in a separate account, companies can get better insights into their actual accounts. They are crucial for compliance with generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). They ensure that financial statements adhere to standardized accounting practices, enhancing the credibility and comparability of financial reports. By the end of the first-year machinery, the balance will be $100,000, and accumulated depreciation will show $20,000. By the end of 2nd-year, the machinery balance will still be $100,000, and accumulated depreciation will show $40,000.

Instead of changing the main account directly, you use a contra account to keep records clear and accurate. These accounts appear in the balance sheet or income statement and ensure transparency in financial reporting. A business might elect to separately state contra asset accounts on its balance sheet, so that the users of its financial statements can obtain additional information about the contents of these accounts. The most common contra account is the accumulated depreciation account, which offsets the fixed asset account. Taken together, the asset account and contra asset account reveal the net amount of fixed assets still remaining.

The coffee grounds represent the total value of an asset, but you don’t drink the grounds directly, right? The filter (your contra asset account) holds back what’s no longer useful, so what you’re left with is the good stuff—the net value. Optimizing your handle on contra accounts doesn’t end with just understanding them; it’s about mastering the tools and techniques to manage them effectively. Enrich your expertise by diving into online courses that dissect advanced accounting concepts, many of which come with coveted CPE credits to boot. You could explore comprehensive webinars and workshops focused on the nitty-gritty of contra accounts. And let’s not forget the all-important Allowance for Doubtful Accounts, acting as a financial crystal ball that estimates the portion of accounts receivable that might just turn into fairy dust.

So as values shift depending on real-world factors, rather than making deductions or adjustments to the original or “parent” account, you would record these changes in the contra account instead.
Baking in room for bad debt, asset depreciation, and returned goods means fewer surprises and more confident stakeholders.
Instead, it is reported at its full amount with an allowance for bad debts listed below it.
To compensate for those potential deadbeat customers, you can use a Bad Debts account to serve as a contra for your A/R.
With the appropriate level of automation integration in your chosen tool, you can pull the relevant values into these individual accounts directly from invoices, credit agreements, and other documentation.

Contra Asset Account Definition

One other type of account is the contra account and for accountants, this is a must-know. 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. 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. External auditors and regulators review financial statements to verify accuracy.

A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet. Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt. They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting. For instance, it is common to keep the purchase price of a piece of equipment as a historical cost in the debit asset account when it comes to fixed assets.

A contra account is an account that companies use to reduce the value of a related account. It usually nets off against related accounts and provides an opposite effect to the balance. Therefore, contra accounts are the reverse accounts that decrease a specific account’s balance. They’re balance sheet accounts, but their activity (like depreciation expense) may flow through to the income statement as an expense. For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance. Learn why contra accounts, when utilized correctly along with a paired account, are a crucial component of accurate accounting contra asset account and financial review.

Contra Account

The accumulated depreciation account plays a vital role in representing the accurate value of an asset in the financial statements. For example, if an account has a debit balance, a contra account will have a credit balance. Thus, netting off both will result in the final amount for the account.

There is the existence of contra accounts in accounting which are accounts that have the purpose of decreasing the value of another specific account if the two accounts are netted or summed together. 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. If every single buyer had taken advantage of the early payment discount, the company would have provided roughly $10 thousand in discounts during that same timeframe. In reality, the actual number of company discounts came closer to $5 thousand. According to the Financial Accounting Standards Board (FASB), businesses must present a true financial picture. Contra accounts help you meet this standard by showing real economic value.

2. Repurchased Treasury Stock Shares Equity Contra

A contra account is an asset account that is kept at either a negative or zero balance and is used on a balance sheet to offset the positive balance of a paired asset. To put it another way, a contra account is an account listed within a general ledger with the purpose of capturing the reduced value of a paired or related account when the two are added together. Not every sale results in full payment, and not all assets retain their value over time. Contra accounts allow businesses to account for unpaid invoices, depreciation, and discounts.

Examples of Contra Asset Accounts

Contra accounts are an indispensable part of accounting, offering a way to fine-tune financial statements without compromising the integrity of original data. Whether it’s tracking depreciation, estimating uncollectible receivables, or recording sales returns, contra accounts ensure that businesses can present a clear and accurate financial picture. Tools like QuickBooks can simplify managing these accounts—learn more about how in our blog post, What is QuickBooks? At the end of the accounting period, update your financial statements to include contra account balances. On the balance sheet, subtract contra assets from total assets and adjust liabilities using contra liability accounts.

Why Do We Use Contra Asset Accounts?

Taking the example of CCC again, the company has $50,000 in accounts receivable at year-end of December 31. CCC estimates that 5% of accounts receivable will most likely be unrecoverable. In other words, contra revenue is a deduction from gross revenue, which results in net revenue.

Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.