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 which account is an example of a contra-expense account? 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.

• In bookkeeping, a contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit (negative) balance.
• A contra expense account is an account used to reduce the amount of an expense without changing the balance in the main expense account.
• Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset.
• Conversely, consistent discounts received could indicate strong supplier relationships and effective negotiation tactics.
• Contra accounts are an essential component of the accounting process, designed to reflect the true value of assets, liabilities, equity, or revenue of a business.
• The OID is calculated as the difference between the redemption price and the discounted issuance price.
• The mechanics of contra expense accounts involve debits and credits, similar to other accounts in double-entry bookkeeping.

What Is a Contra Liability Account

In this way, the historical cost, the amount of write-off, and the book value of an asset can always be seen on the balance sheet. Now, if that sounded like a lot of mumbo-jumbo jargon to you, don’t worry. In this article, we’re going on a deep dive into what exactly a contra account is, how contra accounts work, why and how you would use contra accounts and more. The Allowance for Doubtful https://www.bookstime.com/ Accounts is used to track the estimated bad debts a company my incur without impacting the balance in its related account, Accounts Receivable. An estimate of bad debts is made to ensure the balance in the Accounts Receivable account represents the real value of the account. Allowance for Doubtful Accounts pairs with the Bad Debts Expense account when doing adjusting journal entries.

Impact on Financial Statements

This will ensure the net value of accounts receivable at year-end is not overstated. Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. 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.

Double Entry Bookkeeping

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, it’s worth spending a little bit more time on them here, including common subtypes. The presence of contra expense accounts significantly influences the presentation and interpretation of financial statements.

• This means that entries recorded on the left side of the T-account will increase the asset balance and entries recorded on the right side will decrease it.
• The net balance of the accounts shows the net value of the purchases made by the business for the accounting period.
• Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.
• Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset.
• Bills payable or notes payable is a liability that is created when a company borrows any specific amount of money.

What are the Five Types of Contra Accounts?

Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount.

Is a Contra Account a Debit or Credit?

At the same time, our Accounts Receivable Automation software and Accounts Payable Automation software makes tracking, managing, and processing crucial assets and liabilities — and their contras — easier than ever before. The concepts of debits and credits in accounting dictate how transactions are recorded. For instance, to increase asset and expense accounts, we simply record a debit and to decrease those accounts, we can record a credit. A contra account is a general ledger account with a balance that is opposite of the normal balance for that account classification. The use of a contra account allows a company to report the original amount and also report a reduction so that the net amount will also be reported. The net amount is often referred to as the carrying amount or perhaps the net realizable amount.

What is a Contra Revenue Account?

Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement. 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.

Types of contra accounts