And by comparing these contras against their corresponding parent accounts, you can better understand the actual value of the assets retained by your business. Because contra asset accounts are used so frequently, what is a contra account it’s worth spending a little bit more time on them here, including common subtypes. A contra account is a negative account that is netted from the balance of another account on the balance sheet.

Contra Asset Accounting & Examples

A debit will be made to the bad debt expense for $4,000 to balance the journal entry. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. In a sales returns and allowances contra revenue account, you offset the balance in the sales revenue account.

Contra account examples

When a company repurchases shares, it increases the fractional ownership of all remaining shareholders. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming. The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable.

Income Statement: Definition, Types, Templates, Examples, and More

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. Expense accounts are technically contra equity accounts because they are linked to another equity account, revenue, and maintain an opposite balance. The expense account uses its debit balance to reduce the revenue account’s credit balance.

Everything You Need To Master Financial Modeling

Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock. The auditors aim to keep the balances at their adequate levels, but the controller might want to keep them as low as possible to reduce expenses and maximize profit levels. Simultaneously, allowance for doubtful debt account shows a closing balance of $5,000. CCC bought equipment and machinery worth $100,000 at the beginning of the current financial year and estimates that the equipment and machinery will depreciate by $10,000 every year. A business called Show-Fleur offers private driving tours of local botanical gardens — all from the comfort of high-end limousines.

• Contra accounts are confusing at first, but, with a little study, understanding them becomes second nature.
• In order to keep the accounts receivables as clean as possible with their historical values, we will use this contra account called allowance for doubtful accounts.
• For example, Accumulated Depreciation is a contra asset account, because its credit balance is contra to the debit balance for an asset account.
• 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.
• There are two major methods of determining what should be booked into a contra account.
• Instead of reporting the assets at their carrying amount directly, assets are reported at their historical costs and are reduced to book value by reporting the allowance for depreciation along with it.

What is Contra Entry?

Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. The above amount is recorded in the bank column (debit) side of the double column cash book. Debit and credit aspects of a single transaction are entered in the same account but in different columns. 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. In other words, accumulated depreciation will be $10,000 each year until the car depreciates to $0 twenty years later.

Recording Contra Accounts

This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders. Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at Scale Venture Partners, focused on technology. He’s currently a VP at KCK Group, the private equity arm of a middle eastern family office.

Doubtful Debts and Contra Assets

• A contra account is an asset account that is kept at either a negative or zero balance and is used on a balance sheet to offset the positive balance of a paired asset.
• A contra asset account is an asset account with a natural credit balance.
• Although you have not officially written off these debts yet, you show them to be a negative balance because you don’t believe the customer will pay you.
• However, that $1.4 billion is used to reduce the balance of gross accounts receivable.
• The two most common contra accounts on a balance are accumulated depreciation and the allowance for doubtful debts.

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. And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand. A contra account is used to show the opposite effect or reduction of a related account. The main reason is to make the remaining shares more valuable, as their prices are expected to rise after the stock buyback.

The most common contra equity account is called “treasury stock.” This special account decreases the number of shares outstanding in the market because the company repurchases some of the shares from its buyers. Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks. In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000. If the asset account had a credit balance or the contra asset account had a debit balance, this would indicate an error in the journal entries. A contra asset account is an account in the balance sheet that offsets the balance of a regular asset account.