Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value. Properly documenting these contra accounts in your ledger can sometimes feel counter-intuitive since they operate in an opposite manner from their parent accounts. Consider an asset account, where the values are listed as debits, and the account itself will present a positive total. Conversely, for a contra asset account like depreciation, you would list all entries as a credit, carrying a negative total balance for the overall account.
What is a Contra Expense Account?
Contra equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock. The Notes Receivable account documents the total value of any promissory notes held by the company. Typically, these notes reflect purchases made on credit by your customers.
Asset Contra Account
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. Expenses are the costs of operating contra revenue account your business, like rent, salaries, and utilities. Contra revenue, on the other hand, directly reduces the sales figures reported on your financial statements. While both affect your net income, they do so in different parts of your income statement.
Contra liability account example
Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000. Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements. Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. Contra revenue is a deduction from the gross revenue reported by a business, which results in net revenue. These deductions are a common part of doing business, especially if you are trying to retain customers by offering them discounts from the list prices of your goods and services.
In double entry bookkeeping terms, a contra revenue account or contra sales account refers to an account which is offset against a revenue account. In your income statement, the gross sales are $50,000 less than the sales returns and allowances of $1000. If this is part of your business model, you’ll want to record every refund, return or discount in your contra revenue account to help you better understand the differences between your gross revenue and the net revenue. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.
- A contra account is a general ledger account that offsets the balance of a corresponding account with which it’s paired.
- The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet.
- So rather than adjusting your Inventory account, you would update its contra account — Obsolete Inventory.
- Contra liability, equity, and revenue accounts have natural debit balances.
- For instance, if a company has a plant asset such as Equipment with a debit balance of $92,000 and the account Accumulated Depreciation has a credit balance of $50,000, the carrying amount (or book value) of the equipment is $42,000.
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