What is a Contra Account?
Contra Account is an opposite entry passed to offset the balances of related original account in the ledger and helps the organization to retrieve the original amount and the amount of decrease in the value, thereby presenting the net balances of the account.
- It is a general ledger account with a purpose to have its balance to be the opposite of the original balance for that account. It is linked to specific accounts and is reported as reductions from these accounts.
- The transactions made in this account are reported on a company’s financial statements directly under the related account.
- The usual pattern for a Contra Account is Gross Amount – (Amount in the Contra Ac) = Net Amount.
List of Contra Accounts with Examples
These accounts can be listed based on the respective asset, liability, or equity account to reduce their original balance.
Below is the list you should be aware of –
#1 – Contra Asset
An asset that is recorded as a credit balance is used to decrease the balance of an asset. The balance of a contra asset accountContra Asset AccountA contra asset account is an asset account with a credit balance related to one of the assets with a debit balance. When we add the balances of these two assets, we will get the net book value or carrying value of the assets having a debit balance. is a credit balance. This account decreases the value of a hard asset. This account is not classified as an asset since it does not represent a long term value. It is not classified as a liability since it does not constitute a future obligation.
These contra accounts examples include
- Allowance for doubtful accounts – Allowance for doubtful accounts is the percentage of bad debts that are estimated from the Accounts receivable account. This account offsets a company’s accounts receivable accountAccounts Receivable AccountAccounts receivables refer to the amount due on the customers for the credit sales of the products or services made by the company to them. It appears as a current asset in the corporate balance sheet..
- Accumulated Depreciation – Depreciation is the reduction in the value of an asset. Accumulated depreciation represents the cumulative amount of depreciation that is incurred by an asset. This account offsets a company’s real property assets that include machinery, furniture, and buildings, etc. Accumulated depreciationAccumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset's purchase price and its carrying value on the balance sheet. reduces the value of an asset.
#2 – Contra Liability
A liability that is recorded as a debit balance is used to decrease the balance of a liability. The balance of a contra liability account is a debit balance. This account decreases the value of the liability. Contra Liability a/c is not used as frequently as contra asset accounts. It is not classified as a liability since it does not represent a future obligation.
The examples of contra liability account include:
- Discount on bonds payable – This is the difference between the amount of cash a company receives when issuing bondsBondsA bond is financial instrument that denotes the debt owed by the issuer to the bondholder. Issuer is liable to pay the coupon (an interest) on the same. These are also negotiable and the interest can be paid monthly, quarterly, half-yearly or even annually whichever is agreed mutually. and the value of the bond at maturity. The value of a bond is reduced by Discount on bonds payableDiscount On Bonds PayableDiscount on bonds payable is the markdown value of a bond's coupon rate or selling price compared to its market interest rate or fair value. Such bonds trade at a lower price than their face value..
- Discount on notes payableNotes PayableNotes Payable is a promissory note that records the borrower's written promise to the lender for paying up a certain amount, with interest, by a specified date. – The discount offered on the liability that is created when a company borrows a specific amount of money and repays it early. Discount on notes payable reduces the total amount of the note to reflect the discount offered by the lender.
#3 – Contra Equity
Equity that is recorded as a debit balance is used to decrease the balance of a standard equity account. It is a reduction from equity because it represents the amount paid by a corporation to buy back its stockBuy Back Its StockShare buyback refers to the repurchase of the company’s own outstanding shares from the open market using the accumulated funds of the company to decrease the outstanding shares in the company’s balance sheet. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company.. The contra equity account reduces the total number of outstanding sharesOutstanding SharesOutstanding shares are the stocks available with the company's shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner's equity in the liability side of the company's balance sheet.. The treasury stock accountTreasury Stock AccountTreasury Stock is a stock repurchased by the issuance Company from its current shareholders that remains non-retired. Moreover, it is not considered while calculating the Company’s Earnings Per Share or dividends. is debited when a company buys back its shares from the open market.
#4 – Contra Revenue
A reduction from gross revenue, which results in net revenue, is the contra revenueContra RevenueContra revenue refers to any difference between a company's gross sales and net sales due to sales returns, allowances or discount. A contra revenue account always has a debit balance. account. These transactions are reported in one or more contra revenue accounts, which usually have a debit balance and reduces the total amount of the company’s net revenue.
The examples of contra revenue accountRevenue AccountRevenue accounts are those that report the business's income and thus have credit balances. Revenue from sales, revenue from rental income, revenue from interest income, are it's common examples. include:
- Sales Returns- Sales returns is a Contra Ac of the sales account. This transaction records when a customer returns the paid goods, and a refund needs to be given.
- Sales Allowances- Sales allowances are also a part of the sales account. Sales allowance is the reduction in the selling price when a customer agrees to accept a defective unit instead of returning it to the seller.
- Sales Discounts – Sales discounts are offered on sales of goods to attract buyers. It is an incentive to purchase the goods.
Debit or Credit
As you know, from studying the basics of debit and credit, balance sheet accountsBalance Sheet AccountsA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. have a healthy balance.
- Assets accounts have a debit balance. Contra assets have a credit balance.
- Liabilities accountsLiabilities AccountsLiability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company. have a credit balance. Contra liabilities have a debit balance.
- Equity accounts have a credit balance. Contra equity has a debit balance.
- Revenue accounts have a credit balanceCredit BalanceCredit Balance is the capital amount that a company owes to its customers & it is reflected on the right side of the General Ledger Account. Usually, Liability accounts, Revenue accounts, Equity Accounts, Contra-Expense & Contra-Asset accounts tend to have the credit balance. . Contra revenues have a debit balanceDebit BalanceIn a General Ledger, when the total credit entries are less than the total number of debit entries, it refers to a debit balance. A debit balance is a net amount often calculated as debit minus credit in the General Ledger after recording every transaction..
Why are Contra Accounts Important?
This article has been a guide to Contra Account. Here we discuss the list of contra accounts, including Assets, Liability, Equity, and Revenue, along with examples. You can learn more about accounting from the following articles –