The amount on the equity contra account is deducted from the value of the total number of outstanding shares listed on a company’s balance sheet. As mentioned, CA accounts are usually listed below their matching asset accounts, and the net values of those assets are written next to the contra accounts. Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets.

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. A contra account is an account that is used to offset another account. The balance in the contra account is reduced when the corresponding asset or liability it is paired with is disposed of. For example, if the balance of accumulated depreciation increases from $20,000 to $50,000, this means that the depreciation expense amounts to $30,000, which will be listed in the income statement.

Presentation of Contra Asset Accounts

In the books, the account of the asset would have a debit value of $100,000, and the CA account would have a credit value of $30,000. If the asset account had a credit balance or the CA account had a debit balance, this would indicate an error in the journal entries. Although they all aim at reducing the balance of some type of account, it is useful to have some general foundational knowledge of the different types of accounts. 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.

For most companies, the contra asset accounts will also include several types. Before understanding contra asset accounts, it is crucial to learn what contra accounts are. The contra asset account carries a credit balance because an asset account usually has a debit balance. Such accounts are allowance for doubtful accounts and the accumulated depreciation account. Contra equity accounts are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds. Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances.

What is Contra Account?

The proper size of a contra asset account can be the subject of considerable discussion between a company controller and the company’s auditors. The auditors want to ensure that reserves are adequate, while the controller is more inclined to keep reserves low in order to increase the reported profit level. A contra account is an entry on the general ledger with a balance contrary to the normal balance for https://www.apzomedia.com/bookkeeping-startups-perfect-way-boost-financial-planning/ that categorization (i.e. asset, liability, or equity). When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. 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 discount on bonds payable amount shows the difference between the amount of cash received when issuing a bond and the value of the bond at maturity. For example, a building is acquired for $20,000, that $20,000 is recorded on the general ledger while the depreciation of the building is recorded separately. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. 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 expiration date since any inventory remaining in stock past the expiration date quickly becomes obsolete.

What Are the Different Types of Contra Accounts?

This contra account holds a reserve, similar to the allowance for doubtful accounts. For each debit against the inventory account, there will be a corresponding credit against the obsolete inventory contra account. To offset this, the allowance for doubtful accounts balance is adjusted via a credit, while the bad debt account is debited to balance out the AR account. When combined, the AR account and the allowance for doubtful accounts contra assets offer a projection of how much net cash is expected to be received from outstanding accounts.

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, bookkeeping for startups contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. On the other hand, accumulated depreciation is a contra asset account.

However, the details for contra accounts usually exist on the notes to the financial statements. However, these can cause a reduction in other balances on the statement. A company’s financial accounts will usually have three types of items. Assets are debit balances that include resources with expected positive future economic benefits.

Accumulated depreciation is the most prevalent type of contra asset account. It represents all the depreciation related to an asset or the company’s overall assets. Usually, companies add to the accumulated depreciation account after every accounting period. The accumulated depreciation account plays a vital role in representing the accurate value of an asset in the financial statements. Contra accounts appear on the same financial statement as the related account.

Free Financial Statements Cheat Sheet

Contra accounts are needed for determining the book value of assets held by a company. For accounting purposes, the book value is realized by the difference between the asset’s account balance and contra account balance. Contra accounts play a major role in estimating the book value of an asset. Sometimes, the current value of a note receivable will fall compared to its face value. This process will give rise to a contra asset account which is the discount on notes receivables.

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. 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. The amount for estimated uncollectible accounts is a bad debt operating expense.