Contra Account What Is It, List, Examples, Vs Adjunct Account

In other words, it tracks reductions against a paired account, helping you break out gross and net amounts in your financial records. Imagine running a company and anticipating that you will collect all your receivables, only to discover later that some are uncollectible. Or think of investing in a costly piece of equipment only to decrease its value over time. Without Car Dealership Accounting contra-asset accounts, these financial realities wouldn’t be properly reflected in statements, leading to overstated assets and misleading reports.

• Without contra accounts, adjusting the reported value would erase the historical record of the original investment.
• Another example includes allowance for doubtful accounts, which estimates potential losses from uncollectible receivables, helping you present a more realistic view of your expected cash flow.
• Just remember that they carry an opposite balance than the other accounts in their account type.
• Consider a business that offers an early payment discount to its customers, cutting their invoiced total by 3% if they pay within 1 week of invoicing.
• One such method is the use of contra accounts, a type of account that directly correlates and offsets a related account.

Characteristics of Contra Accounts

Concurrently, an allowance for doubtful accounts is established or adjusted, which is a contra-asset account that offsets the accounts receivable balance on the balance sheet. These methods affect the depreciation expense reported on the income statement and accumulated depreciation, which is the contra-asset account used to reduce the carrying amount of the fixed assets. Accurate financial reporting requires more than simply listing assets, liabilities, and revenues at their acquisition cost or gross value. A company’s balance sheet and income statement must present figures that reflect the current economic reality of those accounts. The most common contra type, contra assets, records the loss in value of any asset accounts listed in your general ledger.

Bookkeeping with Contra Asset Accounts

A contra expense account is an account used to reduce the amount of an expense without changing the balance in the main expense account. Examples of contra expense accounts include Purchase Returns, Purchase Discounts, and Advertising Reimbursements. 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. A delivery van is purchased by a business to use in delivering product and picking up materials. The company uses Straight-Line Depreciation to track the loss of value of the asset over time. Analyze trends in returns, allowances, or bad debt over multiple years to anticipate cash flow challenges and plan for seasonal or operational risks before they impact your business.

Role in Accurate Reporting

Like we mentioned above, normal asset accounts have a debit balance, while contra-asset accounts carry a credit balance. Have you ever wondered why certain asset accounts on a company’s balance sheet have a negative balance? However, these special accounts—also referred to as counter assets—are essential to ensuring that contra asset account financial statements fairly depict the actual state of a company’s finances. A contra equity account reduces the balance of an equity account, which normally has a credit balance.

• 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.
• Contra accounts play a vital role in accurate financial reporting by offsetting related accounts to reveal true asset, liability, equity, and revenue values.
• Instead of changing the main account directly, you use a contra account to keep records clear and accurate.
• As an owner or manager of a field service business, knowing how contra accounts work gives you sharper insight into the real financial health of your company.
• Far less common is the obsolete inventory reserve, which reduces the overall inventory value on the balance sheet.
• Because contra asset accounts are used so frequently, it’s worth spending a little bit more time on them here, including common subtypes.

Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. /Allowance for doubtful accounts is netted from the accounts receivable balance. The company predicts which accounts receivable won’t be paid by customers and writes those off. Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Offsetting the asset account with its respective contra asset account shows the net balance of that online bookkeeping asset.