Contra Account Definition + Journal Entry Examples

Accounts Receivable (AR) refers to the money a company is owed by its customers for goods or services that have been delivered but not yet paid for. This amount represents a short-term asset on the company’s balance sheet and indicates the credit extended to customers. A less common example of a contra asset account is Discount on Notes Receivable. The credit balance in this account is amortized or allocated to Interest Income or Interest Revenue over the life of a note receivable. At Invoiced, we provide a suite of solutions that work together to make managing your invoicing, accounts receivable, and accounts payable seamless and easy. To convert your invoice management efforts to an electronic format that can easily share data with other financial systems, businesses can leverage Invoiced’s E-invoice Network.

• Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts.
• At Invoiced, we provide a suite of solutions that work together to make managing your invoicing, accounts receivable, and accounts payable seamless and easy.
• The accounts receivable balance decreases when the client pays the invoice, and the agency’s cash or bank account increases by the same amount.
• Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement.

An example of recording a contra asset

This account serves two purposes — tracking total depreciation expenses while providing you with the accurate book value of the asset being depreciated. Though the Pareto Analysis can not be used on its own, it can be used to weigh accounts receivable estimates differently. For example, a company may assign a heavier weight to the clients that make up a larger balance of accounts receivable due to conservatism. Because the allowance for doubtful accounts is established in the same accounting period as the original sale, an entity does not know for certain which exact receivables will be paid and which will default. Therefore, generally accepted accounting principles (GAAP) dictate that the allowance must be established in the same accounting period as the sale, but can be based on an anticipated or estimated figure.

• The following are examples of commonly-used contra asset accounts you could create to better understand your business financials.
• Contra asset accounts are recorded with a credit balance that decreases the balance of an asset.
• Home Depot reports net receivables and net property and equipment, implying that both are reduced by contra assets.
• Revenue is an income statement account, but it flows through to the equity section of retained earnings as well.
• If a company has a history of recording or tracking bad debt, it can use the historical percentage of bad debt if it feels that historical measurement relates to its current debt.
• When researching companies, the financial statement is a great place to start.
• A liability that is recorded as a debit balance is used to decrease the balance of a liability.

Contra Asset Journal Entry Accounting

The contra asset account of your equipment account is the accumulated depreciation of equipment. When the balance in the accumulated depreciation is $10,000 and your equipment account has a debit balance of $50,000, then the book value of your equipment is $40,000. The equity section of the contra expense account balance sheet is where the shareholder’s claims to assets are reported. The main contra equity account is treasury stock, which is the balance of all stock repurchased by the company. When a company repurchases shares, it increases the fractional ownership of all remaining shareholders.

Is Allowance for Doubtful Accounts a Credit or Debit?

• Company K’s income statement will report the gross Sales of $100,000 minus the sales returns and allowances of $500 and the resulting net sales of $99,500.
• All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
• The net effect of the contra entry journal is that the balance on the accounts payable ledger is cleared and a balance of 800 remains on the accounts receivable ledger, representing the net amount outstanding from the customer.
• For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets.
• A contra account is a general ledger account with a balance that is opposite of the normal balance for that account classification.

A contra account is an account with a balance opposite the normal accounts in its category. Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts. In other words, contra accounts are used to reduce normal accounts on the balance sheet. 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.

Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. Examples of revenue contra accounts are Sales Discounts, Returns and Allowances. Contra liability accounts such as discount on bonds payable and discount on notes payable usually carry debit balances. This depreciation is saved in a contra asset account called accumulated depreciation. The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment. You may want to first classify contra accounts as contra asset accounts, contra liability accounts, contra equity accounts, or contra revenue accounts before accounting for any transaction.

Contra revenue account

The matching principle states that revenue and expenses must be recorded in the same period in which they occur. Therefore, the allowance is created mainly so the expense can be recorded in the same period revenue is earned. A Pareto analysis is a risk measurement approach that states that a majority of activity is often concentrated among a small amount of accounts. In many different aspects of business, a rough estimation is that 80% of account receivable balances are made up of a small concentration (i.e. 20%) of vendors. For example, a company has $70,000 of accounts receivable less than 30 days outstanding and $30,000 of accounts receivable more than 30 days outstanding.

• Occasionally a business has cause to offset an amount owed by a customer (accounts receivable) with an amount owed to a supplier (accounts payable).
• In this example, the company often assigns a percentage to each classification of debt.
• The concepts of debits and credits in accounting dictate how transactions are recorded.
• Osman has a generalist industry focus on lower middle market growth equity and buyout transactions.

So as values shift depending on real-world factors, rather than making deductions or adjustments to the original or “parent” account, you would record these changes in the contra account instead. By viewing these accounts — the parent and contra — in tandem, business owners can gain broader insights, preserve the historical figures stored in the parent account, and make accommodations for any relevant changes. The concepts of debits and credits in accounting dictate how transactions are recorded.

What is a contra asset?

A final word about contra asset accounts