They are used in case some customers won’t be able to pay the money they owe to the business. Contra equity accounts are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds. Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances. Contra accounts appear on the same financial statement as the related account. For example, an accounts receivable’s contra account is a contra asset account.

When the amount recorded in the contra revenue accounts is subtracted from the amount of gross revenue, it equals the net revenue of a company. In case a customer returns a product, the company will record the financial activity under the sales return account. The contra liability account is less common than the contra asset account. An example of a contra liability account is the bond discount account, which offsets the bond payable account.

Definition Of a Contra Account?

If we show $60,000 as an asset in the third year, it will be challenging to understand whether $60,000 is all new purchases or the remaining value of an asset. This account helps all the stakeholders understand the financial numbers accurately. Outstanding SharesOutstanding shares are the stocks available with the company’s shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner’s equity in the liability side of the company’s balance sheet.

If the asset account had a credit balance or the CA account had a debit balance, this would indicate an error in the journal entries. The definition can be expanded to include contra accounts in general. Contra accounts act like regular accounts on the balance sheet but have a unique purpose.

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This is done to entice customers to keep products instead of returning them. For example, items with slight faults being sold with a discount. 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.

• Creating this contra asset account builds in a safeguard against overstating your accounts receivable balance.
• Both the asset and the corresponding CA accounts must be stated clearly in the balance sheet.
• Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance.
• Contra accounts provide more detail to accounting figures and improve transparency in financial reporting.
• Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet.
• Contra liability accounts are mainly used by corporations that issue bonds frequently.

An example would be a contra liability account which would be debited to offset a regular liability account. You’ll continue to use the contra asset account until the equipment has been completely depreciated, retired, or sold. Contra asset accounts can be used in a variety of areas, but there are three contra asset examples that you should pay close attention to. A contra account is where we record events that are contrary to a general ledger parent account, also called a relating account.

Contra Asset Account Example

The main reason is to make the remaining shares more valuable, as their prices are expected to rise after the stock buyback. The auditors aim to keep the balances at their adequate levels, but the controller might want to keep them as low as possible to reduce expenses and maximize profit levels. an example of a contra-asset account is: Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values. Reserve for obsolete inventory, the counterpart of inventories. Advisory services provided by Carbon Collective Investment LLC (“Carbon Collective”), an SEC-registered investment adviser.

The asset’s balance is reduced by the impairment amount to reflect the asset’s new economic value and the account remains on the balance sheet. The decrease in the asset and accumulated depletion accounts reduces the balance to zero and removes the account from the balance sheet. Notes receivable are considered current assets if they are to be paid within 1 year and non-current if they are expected to be paid after one year. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. 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. When a company gives a discount to customers in an effort to convince them to buy its goods or services, it is recorded in the discount on sales account.

This transaction records when a customer returns the paid goods, and a refund must be given. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Contra LiabilityFinancing fees in M&A are an example of a contra liability, as the fees are amortized over the debt’s maturity – which in turn reduces the tax burden until the end of the term. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting.

An allowance for doubtful accounts is a contra-asset account that reduces the total receivables reported to reflect only the amounts expected to be paid. Likewise, when you pay a bill, your cash account is reduced because you’re lowering the balance. 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.

Contra Revenue Account

Sales returns, sales allowance and sale discounts are different examples of contra revenue accounts. Contra accounts such as these have a debit balance and are deducted from the total amount of a company’s revenue. The first time a contra asset account is recorded in a journal entry, it is to be deducted from the expense.