Asset accounts always maintain a debit balance, so anytime that you increase the value of an asset, such as when you deposit customer payments or invoice a customer, that asset account is debited or increased. Likewise, when you pay a bill, your cash account is reduced (credited) because you’re lowering the balance. A contra expense account is an account used to reduce the amount of an expense without changing the balance in the main expense account. Examples of contra expense accounts include Purchase Returns, Purchase Discounts, and Advertising Reimbursements. Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset. Each year of an asset’s life, another year of Depreciation Expense is recorded.

• The concepts of debits and credits in accounting dictate how transactions are recorded.
• GAAP, the allowance for doubtful accounts represents management’s estimate of the percentage of “uncollectible” accounts receivable (i.e. the credit purchases from customers that are not expected to be paid).
• Therefore, to ensure accounts receivable stays clean and transparent, CCC will record $2,500 in the contra asset account called “Allowance for Doubtful Accounts”.
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• 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.

Contra Asset

As mentioned, there can be a contra account for any type of transaction depending on a company’s needs. Other than the above contra-asset accounts, we often see contra-revenue accounts for any sales returns or sales rebates. 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.

How are contra accounts recorded?

This way the company can report an item on the balance sheet at itsoriginal amount and show a reduction in value separately in order to report itsnet realizable value. A contra account is a ledger account related to another specificledger account. In fact, as the name “contra” suggests, it is the opposite of aspecific class of account.

How to Record a Contra Account

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 contra expense account 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.

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Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost. Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts. This helps the firms to evaluate the book value of their assets and liabilities.

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• This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders.
• Contra equity accounts are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds.
• 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.
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Overview: What is a contra asset account?

Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets. In case the contra asset account is not listed in the balance sheet, it must be listed in the footnotes of the financial statement for the users to be informed. 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.

• An estimate of bad debts is made to ensure the balance in the Accounts Receivable account represents the real value of the account.
• In other words, this account’s credit balance is contrary to (or opposite of) the usual debit balance for an expense account.
• The accumulated depreciation will ultimately reduce the value of fixed assets when the two accounts are netted with each other.
• Inventory obsolescence is an expense account, while the allowance for obsolete inventory is a contra asset account, which aims to reduce the inventory valuation on your balance sheet.
• Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation.

Allowance for doubtful debt