Asset accounts usually have a positive value which is the same as a debit balance. With contra equity accounts, you reduce the number of outstanding shares you list on your company’s balance sheet. Treasury stock and owner’s drawing account are examples of contra equity accounts. Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Therefore, a contra asset can be regarded as a negative asset account. Offsetting the asset account with its respective contra asset account shows the net balance of that asset.
The amount due from the customer has been posted to the accounts receivable ledger, whereas the amount due to the supplier is posted to the accounts payable ledger. The purpose of a contra expense account is to record a reduction in an expense without changing the balance in the main account. It can help companies see the complete picture of their income and expenses and their equity or net worth. In this example, the accounts receivable is 10,000, and the allowance for doubtful debt contra account is 1,000, leaving a balance of 9,000. In this way, the historical cost, the amount of write-off, and the book value of an asset can always be seen on the balance sheet. Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a credit
balance.
AccountingTools
The company has a contra asset account for accumulated depreciation expense and a separate asset account for equipment cost. The contra asset account would be used to offset the equipment account on the balance sheet. A contra asset account is an account that is used to offset another fixed asset account on the balance sheet. Contra asset accounts are typically used for accumulated depreciation, amortisation, and other accounting adjustments. For example, a company might have a contra asset account for depreciation expense and a separate asset account for equipment cost. The sales discounts contra revenue account records the discounts given to customers on sales made to them, normally a cash or settlement discount.
To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts. Since it is a contra asset account, this allowance account must have a credit balance (which is contrary to the debit balances found in asset accounts). The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable. Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000. In response, the firm should decrease its accounts receivable and revenue balances. That is done by crediting accounts receivable by $100 and debiting the https://www.bookstime.com/ account sales returns and allowances for $100.
Sales Discounts
Therefore, the asset’s net value (or the book value) will be $70,000. The definition can be expanded to include contra accounts in general. Contra accounts act like regular accounts on the balance sheet but have a unique purpose. A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity).
- Instead, an adjusting journal entry is done to record the estimated amount of bad debt.
- It’s normal for businesses to receive refund requests or returns from customers.
- Both the asset and the corresponding contra asset accounts must be stated clearly in the balance sheet.
- The money left over after a company supports operations can be a snapshot of its financial health.
- It can help businesses see the complete picture of their income and expenses.
We’ll need to dig into the footnotes to find out what the contra accounts are. 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.
Contra Revenue: Could it be your easiest way to improve profit margins? (5-minute read)
Hence, the book value of the liability will be the credit balance of the liability account minus the debit balance of its contra liability counterpart. A contra asset account is an account in contra revenue the balance sheet that offsets the balance of a regular asset account. Home Depot reports net receivables and net property and equipment, implying that both are reduced by contra assets.
- A company receives rebates for advertising it does on behalf of brands it carries in its stores.
- When the contra account reads $500 and the normal credit balance is $100,000, then your net sales are $99,500.
- This means that the $85,000 balance is overstated compared to its real value.
- A delivery van is purchased by a business to use in delivering product and picking up materials.
- On the other hand, the percentage of sales method assumes a fixed percentage of goods or services sold that the company will not be able to collect payment for.
When researching companies, the financial statement is a great place to start. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.
