The net realizable value of the accounts receivable is the accounts receivable minus the allowance for doubtful accounts. 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.

Example of Contra Expense Account

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. Whenever the balance of an account needs to be reduced in a company’s ledger, it is not always applicable to credit the account if it is an asset or debit the account if it is a liability. There is the existence of contra accounts in accounting which are accounts that have the purpose of decreasing the value of another specific account if the two accounts are netted or summed together. We will define what contra accounts are, the types of contra accounts and provide examples to illustrate. The monthly accounting close process for a nonprofit organization involves a series of steps to ensure accurate and up-to-date financial records. For reference, the chart below sets out the type, side of the accounting equation (AE), and the normal balance of some typical accounts found within a small business bookkeeping system.

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• If you’re still using manual accounting systems, you’ll need to do a bit more work by recording your accumulated depreciation expense in your general ledger while also reporting it on your balance sheet as a contra asset account.
• This discount is subtracted from the total amount borrowed to better reflect the discount given by the lender.
• If you offer credit terms to your customers, you probably know that not all of them will pay.
• In reality, the actual number of company discounts came closer to $5 thousand.

Accumulated depreciation

Contra accounts act like regular accounts on the balance sheet but have a unique purpose. The accumulated depreciation will ultimately reduce the value of fixed assets when the two accounts are netted with each other. A contra revenue account allows a company to see the original amount sold and to also see the items that reduced the sales to the amount of net sales. The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet. For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance. You’ll continue to use the contra asset account until the equipment has been completely depreciated, retired, or sold.

Difference Between Depreciation, Depletion, Amortization

Of that amount, it is estimated that 1% of that amount will become bad debt at some point in the future. This means that the $85,000 balance is overstated compared to its real value. At this point, it isn’t known which accounts will become uncollectible so the Accounts Receivable balance isn’t adjusted. Instead, an adjusting journal entry is done to record the estimated amount of bad debt. Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset.

Contra Account Example: Allowance for Doubtful Accounts

Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a creditbalance. GAAP, the allowance for doubtful accounts represents management’s estimate of the percentage of “uncollectible” accounts receivable (i.e. the credit purchases from customers that are not expected to be paid). If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts.

• When considering all of the money currently owed to your business that’s recorded in your Accounts Receivable (A/R) line item as an existing asset, there’s a good chance that not all of those customers are going to pay you back in full.
• Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off.
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• Therefore, to ensure accounts receivable stays clean and transparent, CCC will record $2,500 in the contra asset account called “Allowance for Doubtful Accounts”.

Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets. In case the contra asset account is not listed in the balance sheet, it must be listed in the footnotes of the financial statement for the users to be informed. Both the asset and the corresponding contra asset accounts must be stated clearly in the balance sheet. Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset’s net value or book value. If you offer credit terms to your customers, you probably know that not all of them will pay.

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. At the end of year 20, the car and the accumulated depreciation accounts what is a contra account will be written off from the balance sheet, as the car will be a fully depreciated asset. 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.

By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount. Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset. The contra asset account, accumulated depreciation, is always a credit balance. This balance is used to offset the value of the asset being depreciated, so as of September 1, your $8,000 asset now has a book value of $7,866.67. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance.

Accounts Payable And Invoice Automation Best Practices

• All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
• In response, the firm should decrease its accounts receivable and revenue balances.
• In its general ledger, the business will want to capture its gross sales figures and the actual value of the discount.
• A contra expense account is an account used to reduce the amount of an expense without changing the balance in the main expense account.
• Note that in accounting, the term “book value” is also used interchangeably with net value.
• Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock.

Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. Discount on Bonds Payable is a contra liability account with a debit balance that reduces the normal credit balance of its parent Bonds Payable liability account in order to present the net value of payables on a company’s balance sheet. Discount on Notes Receivable is a contra asset account with a credit balance that reduces the normal debit balance of its parent Notes Receivable asset account in order to present the net value of receivables on a company’s balance sheet. 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.