The accounts normally have a credit balance and in use are offset against the purchases account which is normally a debit balance. The net balance of the accounts shows the net value of the purchases made by the business for the accounting period. If there’s an increase to allowance for uncollectible accounts, you record contra expense the same amount in the bad debt expense of your income statement. Similarly, accumulated depreciation accounts reduce the value of the fixed assets you report on your financial statements. The account Allowance for Doubtful Account is credited when the account Bad Debts Expense is debited under the allowance method.
T Accounting Examples – T Accounts for Beginners
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
- As mentioned, contra asset accounts usually have a negative value which is the same as a credit balance.
- After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.
- We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R).
- The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables.
- Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers.
Contra equity accounts
- A separate account used in such a situation is sometimes called a adjunct account.
- The purpose of the Accumulated Depreciation account is to track the reduction in the value of the asset while preserving the historical cost of the asset.
- For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance.
- 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.
- The main reason is to make the remaining shares more valuable, as their prices are expected to rise after the stock buyback.
- He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.
For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. Another description of a contra expense account is an account that reduces or offsets the amounts reported in another general ledger expense account(s). Allowance for uncollectible accounts, or allowance for doubtful accounts, is one of the most common contra current asset accounts.
List of common contra accounts
Taking the example of CCC again, the company has $50,000 in accounts receivable at year-end of December 31. CCC estimates that 5% of accounts receivable will most likely be unrecoverable. When the company pays the cost of having the flyer printed, a journal entry is done.
Cash Flow Statement
Contra revenue accounts reduce revenue accounts and have a debit balance. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities includes discounts on notes or bonds payable. Contra liability accounts are not as popular as contra asset accounts.
Understanding Contra Expense Accounts in Financial Accounting
There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra liabilities reduce liability accounts and carry a debit balance. Contra equity accounts carry a debit balance and reduce equity accounts.
For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values. 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. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions.
What is a Contra Account? Definition
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. Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost. Contra accounts act like regular accounts on the balance sheet but have a unique purpose. Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts.
