Contra Accounts Recording, Understanding, Types, Example

A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. The B/S impact is where the contra liability comes into play, i.e. the historical value of the debt is not impacted by the OID.

The example for contra liability accounts includes, discount on bonds payable and discount on notes payable which carry normal debit balances. A contra account offsets the balance in another, related account with which it is paired. Contra accounts appear in the financial statements directly below their paired accounts. Sometimes the balances activity ratios-debtors turnover ratio debtors velocity ratio in the two accounts are merged for presentation purposes, so that only a net amount is presented. If the related account is an asset account, then a contra asset account is used to offset it with a credit balance. If the related account is a liability account, then a contra liability account is used to offset it with a debit balance.

The amount on the equity contra account is deducted from the value of the total number of outstanding shares listed on a company’s balance sheet. The amount in the accumulated depreciation account is deducted from the assets of a company, such as buildings, vehicles and equipment. This can help anyone viewing the financial information to find the historical cost of the asset. The accumulated depreciation amount shows how much depreciation expense has been charged against an asset. Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value. 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.

Contra Asset Accounting & Examples

This helps the firms to evaluate the book value of their assets and liabilities. Creating allowances for doubtful accounts represents the percentage of accounts receivable a company believes it cannot collect. Such allowance for doubtful accounts offsets a company’s accounts receivable account.

When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. A Contra Liability carries a debit balance rather than a credit balance, which is the opposite of the normal balance carried by liabilities. The discount on bonds payable amount shows the difference between the amount of cash received when issuing a bond and the value of the bond at maturity. Sometimes, it is important to keep the original balance of the accounts and create the contra accounts to be able to calculate the net value of the account. Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock.

Advisory services provided by Carbon Collective Investment LLC (“Carbon Collective”), an SEC-registered investment adviser. In other words, accumulated depreciation will be $10,000 each year until the car depreciates to $0 twenty years later. The main reason is to make the remaining shares more valuable, as their prices are expected to rise after the stock buyback.

  • Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement.
  • If you debit the contra account, ensure that you offset the related account with a credit balance.
  • In this way, a contra asset (credit) lowers the overall value of your accounts receivables (debit) on the balance sheet.
  • A liability that is recorded as a debit balance is used to decrease the balance of a liability.

A company receives rebates for advertising it does on behalf of brands it carries in its stores. For example, a grocery store displays advertisements for a national brand in its weekly flyer. The national brand gives the grocery store cash, reducing the overall cost of printing the flyer. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting.

Contra Liabilities Account Definition

A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet. Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt. When a contra asset account is first recorded in a journal entry, the offset is to an expense.

Contra Account: Definition, Types & Examples

If there is no offset required against a related liability a contra account might have zero balance. Journal entry item related to contra liability account can possibly be identified with the often used word “discount”. The contra asset account Accumulated Depreciation is deducted from the related Capital Assets to present the net balance on the parent account in a company’s balance sheet. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.

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Notes payable or bills payable represents a liability created when a company signs a written agreement to borrow a specific amount of money. The granter may offer the company a discount if it repays the note early. The discount reduces the total amount of the note to reflect the discount given by the granter. You might have seen in the balance sheet; all the accounts are shown at the net value after all the adjustments.

Understanding Contra Liability Accounts

When the original dollar amount is kept in the original account and a separate account is used for recording the deduction, the resulting financial information becomes more transparent and helpful for stakeholders. For example, a building is acquired for $20,000, that $20,000 is recorded on the general ledger while the depreciation of the building is recorded separately. Discount on sales account represents the discount amount a company gives to customers as an incentive to purchase its products or services. Both ways of accounting will have the same impact but the later one will give you more information such as purchases cost of machinery; how much depreciation is written off etc. When the company pays the cost of having the flyer printed, a journal entry is done. The purpose of the Sales Returns account is to track the reduction in the value of the revenue while preserving the original amount of sales revenue.

This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000. A customer returned $100 worth of items, claiming them to be defective. An important function of contra accounts is to preserve the historical value in the main account while presenting a reduction in the net value. By recording the offset in a separate contra account, accountants can see how much of the value in the main account has been offset. In the above journal entry “Discount on bonds payable account” offsets the “Bonds payable account”, this can be identified since both of them are oppositely treated i.e. debited and credited respectively. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete.

When netted together, the two accounts yield the carrying value of a bond. Contra accounts are crucial in reducing the balance on the paired account. However, contra accounts allow them to track these transactions separately. Furthermore, these accounts are also crucial in allowing companies to record the original values for the paired accounts.

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