Contra Account Nature, Purpose & Examples

Contra Asset Account Examples

The amount is reported on the balance sheet in the asset section immediately below accounts receivable. Property, Plant, and Equipment (PP&E) and Accumulated DepreciationAnother key example involves property and equipment. When a business owns assets like machinery, the value of these assets decreases over time. Contra asset accounts like Accumulated Depreciation account for this decrease. Suppose a company purchases machinery for $50,000, which they expect to use over ten years. Each year, they may amortize $5,000, moving it to the Accumulated Depreciation account and reducing the book value of the machinery.

Is Treasury Stock a Contra Account?

Contra Asset Account Examples

Consider what would happen if you have sales on credit that you reasonably expect will not be paid. In the example of Homes Inc. the percentage of customers defaulting on the account, and the amount defaulted, is estimable and probable. Past experience with uncollected bad debt has been, on average, 10% of credit sales. The sale to the Johnson family will create a bad debt expense estimate of 10% of the amount receivable. As evident from the table below, each contra account has a parent account whose normal balance is often exactly opposite of the normal balance of the relevant contra account.

An example of recording a contra asset

The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock. Since the entry for cash sales is recorded as a credit in a revenue account, then a return on sales will be recorded as a debit in the revenue contra account, Return on Sales or Sales Returns and Allowances. Although you may be familiar with the normal balance requirements of each classification, a contra account will have the opposite requirement. If the bond is sold at a discount, the company will record the cash received from the bond sale as “cash”, and will offset the discount in the contra liability account. However, the details for contra accounts usually exist on the notes to the financial statements.

Contra Liabilities and Equity

CSR can also help attract top talent and drive employee engagement and retention, as more workers seek employers whose values align with their own. Additionally, a proactive approach to ethical and social issues has the potential to prevent legal problems, fines and reputational damage. Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University. A business called Show-Fleur offers private driving tours of local botanical gardens — all from the comfort of high-end limousines. For its day-to-day operations, the business maintains a fleet of 75 identical 2016 Ford Explorer limousines, each initially retailing at $150 thousand. However, these vehicles have experienced significant wear and tear in the intervening years.

Calculating and Estimating Allowances

Contra Asset Account Examples

A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger. 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. To obtain a cash payout before the note reaches maturity, you can sell these notes to a bank or other financial institution for some price below the note’s face value. There is almost always a story behind data; a clarification or historical insight that changes the meaning behind raw figures. In a report, layering on that additional context can be easy, but in a general ledger, you have few options for conveying nuance and subtlety.

  • In response, the firm should decrease its accounts receivable and revenue balances.
  • Sales returned for a refund are posted to the contra account to reduce gross revenue or return on sales.
  • Normal accounts on the general ledger will usually have a debit balance, while contra accounts are typically either zero or hold a negative credit balance.
  • Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares.

How Does a Contra Account Work in Accounting?

A focus on ethical behavior at the corporate level reinforces a broader norm of ethical behavior across other parts of society. CSR practices include donating money, resources or time to positive causes and organizations, such as local and national charities, educational programs, disaster relief and more. Rather than pay this cost up-front and tie up a significant chunk of capital, Show-Fleur makes this purchase on credit with a 90-day due date after invoicing.

Contra Asset Account Examples

The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline. In terms of revenue, a Sales Allowance contra account may be used to record reductions in sales due to discounts, returns, or other allowances, ensuring that net revenue figures exclude these deductions. By diligently reconciling these accounts, an entity can ensure that its accounting records show an accurate depiction of asset values, which is vital for both internal decision-making and external reporting. Contra assets are essential in accounting for accurately presenting the net value of assets.

Instead of debiting the asset account directly, the contra asset account balance will be credited (reduced) separately. The following are examples of commonly-used contra asset accounts you could create to better understand your business financials. However, it’s important to keep in mind that you can create any contra account you want to more clearly describe your business — this is not an exhaustive or definitive list.


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