Types of Contra Accounts List of Examples Explanations Definition

Sometimes the balances 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. Thus, the natural balance of a contra account is always the opposite of the account with which it is paired.

• They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting.
• Two common contra asset accounts include allowance for doubtful accounts and accumulated depreciation.
• Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period.
• Contra asset accounts include allowance for doubtful accounts and accumulated depreciation.
• Contra revenue account, which is used to record the net amounts and usually has a debit balance, as opposed to the revenue account that records the gross amounts.

The same is true for other asset accounts like accounts receivable. Accounts receivable is rarely reported on the balance sheet at its net amount. Instead, it is reported at its full amount with an allowance for bad debts listed below it.

Contra Asset, Contra Liability and Contra Equity

The other side of the transaction is posted to cash because there is no value in retaining the sales transaction in the cash account. Accounting contra asset accounts or contra revenue accounts follow a simple double-accounting procedure to eliminate errors in financial reporting. The most common way to account for contra accounts is to attach the regular account with its connected contra account underneath it on a company’s balance sheet.

• Contra accounts such as these have a debit balance and are deducted from the total amount of a company’s revenue.
• The contra revenue account is a reduction from gross revenue, which results in net revenue.
• For instance, it is common to keep the purchase price of a piece of equipment as a historical cost in the debit asset account when it comes to fixed assets.
• The most common way to account for contra accounts is to attach the regular account with its connected contra account underneath it on a company’s balance sheet.

The allowance method of accounting enables a company to determine the amount reasonable to be recorded in the contra account. Consider what would happen if you have sales on credit that you reasonably expect will not be paid. In the example of Homes Inc. the percentage of customers defaulting on the account, and the amount defaulted, is estimable and probable. Past experience with uncollected bad debt has been, on average, 10% of credit sales. The sale to the Johnson family will create a bad debt expense estimate of 10% of the amount receivable.

What are 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. Examples of contra accounts include Allowance for Doubtful Accounts, Accumulated Depreciation, and Return on Sales.

The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock. It shows deductions from the revenue of a company, which results in net revenue. A contra account accounting contra accounts is an account created for clarification about any adjustments made to an existing item in ledger accounts. For recording the depreciation of fixed assets of a company, a separate account is created.