Contra Accounts: Definition, Types, Example The Motley Fool

For cash withdrawn from a bank for office use, the journal entry includes debiting contra expenses the relevant office expense account and crediting the bank account. As a reminder, assets and expenses are debit accounts whereas liabilities and revenues are credit accounts. One other type of account is the contra account and for accountants, this is a must-know. Writing off your obsolete inventory in this manner allows you to expense the cost of the obsolete inventory while also decreasing your current inventory balance using the contra asset account.

Contra accounts definition

In footnote 3, the company reports, “Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021.” The difference between an asset’s account balance and the contra account balance is known as the book value. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. A Contra Account https://x.com/BooksTimeInc is an account that holds transactions that offset or counterbalance the balance in another related account.

Purchase of Fixed Assets through Bank Payment:

• The concepts of debits and credits in accounting dictate how transactions are recorded.
• If you keep a lot of inventory in stock, chances are that some of the inventory will become obsolete.
• 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.
• If you debit the contra account, ensure that you offset the related account with a credit balance.

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Accumulated Depreciation as a Contra Asset

• Contra Journal entries emerge as pivotal instruments that orchestrate financial precision within businesses.
• You may want to first classify contra accounts as contra asset accounts, contra liability accounts, contra equity accounts, or contra revenue accounts before accounting for any transaction.
• The amount is reported on the balance sheet in the asset section immediately below accounts receivable.
• Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available.
• This indicates that out of $100,000 sales, your customers return goods valued at $500.

Home Depot also devotes footnote 4 to its share repurchase program and reports that the company is authorized by its board to repurchase $20 billion in shares. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees. If you keep a lot of inventory in stock, chances are that some of the inventory will become obsolete. This frequently happens to manufacturing companies that sell products with an https://www.bookstime.com/ expiration date since any inventory remaining in stock past the expiration date quickly becomes obsolete.

• When the contra account reads $500 and the normal credit balance is $100,000, then your net sales are $99,500.
• Instead, you need to record this value gap, and a contra asset account serves that purpose.
• CCC estimates that 5% of accounts receivable will most likely be unrecoverable.
• By accounting for discounts and other adjustments, GadgetHub can track its actual expenses more effectively and make more informed decisions about its inventory purchases and supplier relationships.
• The company predicts which accounts receivable won’t be paid by customers and writes those off.
• The list of asset accounts on your general ledger and balance sheet conveys the combined, potential value of all of the tangible and intangible items that your organization possesses.

Contra equity and contra revenue

This transparency is crucial for maintaining the trust of investors, creditors, and other stakeholders, as it demonstrates a commitment to accurate and honest financial reporting. The contra asset account of your equipment account is the accumulated depreciation of equipment. When the balance in the accumulated depreciation is $10,000 and your equipment account has a debit balance of $50,000, then the book value of your equipment is $40,000. By using contra expense accounts, financial statement users can gain a more accurate and detailed understanding of the company’s expense structure, allowing for better financial analysis and decision-making.

Popular Types of Contra Accounts

Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset. Therefore, to ensure accounts receivable stays clean and transparent, CCC will record $2,500 in the contra asset account called “Allowance for Doubtful Accounts”. This will ensure the net value of accounts receivable at year-end is not overstated. The cost of goods sold (COGS) account will have a debit balance of $100,000, representing the initial cost of the inventory. The purchase discounts account will have a credit balance of $2,000 (2% of $100,000), which represents the discount received from the supplier.