Contra Account Definition: Types and Example
What Is a Contra Account?
A contra account is utilized in a normal ledger to cut back the worth of a associated account when the 2 are netted collectively. A contra account’s pure steadiness is the alternative of the related account. If a debit is the pure steadiness recorded within the associated account, the contra account data a credit score. For instance, the contra account for a hard and fast asset is gathered depreciation.
- A contra account is an account utilized in a normal ledger to cut back the worth of a associated account.
- They’re helpful to protect the historic worth in a foremost account whereas presenting a lower or write-down in a separate contra account that nets to the present ebook worth.
- Contra accounts are offered on the identical monetary assertion because the related account, usually showing instantly under it with a 3rd line for the online quantity.
- Word that accountants use contra accounts fairly than scale back the worth of the unique account on to preserve monetary accounting data clear.
- Key examples of contra accounts embrace gathered deprecation and allowance for uncertain accounts.
Understanding a Contra Account
Contra accounts are reported on the identical monetary assertion because the related account. For instance, a contra account to accounts receivable, usually known as allowance for uncertain accounts, is a contra asset account.
This kind of account might be known as the allowance for uncertain accounts or dangerous debt reserve. The steadiness within the allowance for uncertain accounts represents the greenback quantity of the present accounts receivable steadiness that’s anticipated to be uncollectible. The quantity is reported on the steadiness sheet within the asset part instantly under accounts receivable. The web of those two figures is usually reported on a 3rd line.
Accountants use contra accounts fairly than scale back the worth of the unique account on to preserve monetary accounting data clear. If a contra account is just not used, it may be tough to find out historic prices, which might make tax preparation tougher and time-consuming.
By retaining the unique greenback quantity intact within the unique account and decreasing the determine in a separate account, the monetary info is extra clear for monetary reporting functions. For instance, if a chunk of heavy equipment is bought for $10,000, that $10,000 determine is maintained on the overall ledger even because the asset’s depreciation is recorded individually.
Contra accounts present extra element to accounting figures and enhance transparency in monetary reporting.
Forms of Contra Accounts
There are 4 key forms of contra accounts—contra asset, contra legal responsibility, contra fairness, and contra income.
- Contra asset: Account reported together with different property that naturally has a credit score steadiness.
- Contra legal responsibility: Account reported together with different liabilities that naturally has a debit steadiness.
- Contra fairness: Account reported together with different fairness accounts that naturally has a debit steadiness.
- Contra income: Account reported together with different income accounts that naturally has a debit steadiness.
Contra asset accounts embrace allowance for uncertain accounts and gathered depreciation. Contra asset accounts are recorded with a credit score steadiness that decreases the steadiness of an asset. A key instance of contra liabilities embrace low cost on notes or bonds payable. Contra liabilities maintain a debit steadiness. Contra legal responsibility accounts should not as widespread as contra asset accounts.
A contra legal responsibility is an account during which exercise is recorded as a debit steadiness is used to lower the steadiness of a legal responsibility. The steadiness of a contra legal responsibility account is a debit steadiness. This account decreases the worth of the legal responsibility. Contra Legal responsibility a/c is just not used as ceaselessly as contra asset accounts. It isn’t categorised as a legal responsibility because it doesn’t symbolize a future obligation.
The third contra kind is contra fairness. These contras scale back the fairness account and carry a debit steadiness. Contra fairness reduces the overall variety of excellent shares on the steadiness sheet. The important thing instance of a contra fairness account is Treasury inventory, which represents the quantity paid to buyback inventory.
Final, for contra income accounts there are gross sales reductions, gross sales allowances, or gross sales returns. Contra income decreased gross income, leading to internet income. These contra income accounts are likely to have a debit steadiness and are used to calculate internet gross sales.
How you can Document a Contra Account
When a contra asset account is first recorded in a journal entry, the offset is to an expense. For instance, a rise within the type of a credit score to allowance for uncertain accounts can also be recorded as a debit to extend dangerous debt expense.
When accounting for property, the distinction between the asset’s account steadiness and the contra account steadiness is known as the ebook worth. There are two main strategies of figuring out what needs to be booked right into a contra account.
The allowance methodology of accounting permits an organization to estimate what quantity is affordable to ebook into the contra account. The share of gross sales methodology assumes that the corporate can’t accumulate cost for a hard and fast share of products or providers that it has offered. Each strategies lead to an adjustment to ebook worth.
For instance, an organization has $40,000 price of accounts receivable at September month-end. It estimates 10% of its accounts receivable will likely be uncollectible and proceeds to create a credit score entry of 10% x $40,000 = $4,000 within the contra account, allowance for uncertain accounts.
In an effort to steadiness the journal entry, a debit will likely be made to the dangerous debt expense for $4,000. Though the accounts receivable is just not due in September, the corporate nonetheless has to report credit score losses of $4,000 as dangerous money owed expense in its revenue assertion for the month. If accounts receivable is $40,000 and allowance for uncertain accounts is $4,000, the online ebook worth reported on the steadiness sheet will likely be $36,000.
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The distinction between an asset’s account steadiness and the contra account steadiness is called the ebook worth.
Instance of a Contra Account
A significant instance of a contra account is allowance for uncertain accounts. This contra asset reduces the steadiness of gross accounts receivable by an estimate of what number of receivables will go uncollected. Discover on Amazon’s steadiness sheet that the steadiness of accounts receivable is famous as being a internet quantity.
Amazon sheds extra mild into that internet steadiness within the notes to the monetary statements. The steadiness of the contra asset consists to the estimate talked about under.
What Is the Advantage of Utilizing a Contra Account?
Contra accounts are used to cut back the worth of the unique account on to preserve monetary accounting data clear. If a contra account is just not used, it may be tough to find out historic prices, which might make tax preparation tougher and time-consuming.
What Are the Totally different Forms of Contra Accounts?
There are 4 key forms of contra accounts—contra asset, contra legal responsibility, contra fairness, and contra income. Contra property lower the steadiness of a hard and fast or capital asset, carrying a credit score steadiness. Contra liabilities scale back legal responsibility accounts and carry a debit steadiness. Contra fairness accounts carry a debit steadiness scale back fairness accounts. Contra income accounts scale back income accounts and have a debit steadiness.
What Are Examples of a Contra Asset Account?
Key examples of contra asset accounts embrace allowance for uncertain accounts and gathered depreciation. Allowance for uncertain accounts scale back accounts receivable, whereas gathered deprecation is used to cut back the worth of a hard and fast asset.
Is a Contra Balances Damaging or Optimistic?
Relying on the way you view the account steadiness, a contra account steadiness will be adverse or constructive. On one hand, a contra asset represents a real, constructive quantity of one thing. Within the Amazon instance above, the corporate estimated roughly $1.4 billion of accounts receivable had been uncollectable, and that uncollectable quantity is constructive.
Nevertheless, that $1.4 billion is used to cut back the steadiness of gross accounts receivable. Due to this fact, contra accounts, although they symbolize a constructive quantity, are used to internet scale back a gross quantity. Because of this, contra accounts are primarily seen as having adverse balances as a result of they’re used to cut back the steadiness of one other account.
Do Contra Accounts Have Debit or Credit score Balances?
Contra property have pure credit score balances. Whereas property usually have constructive debit balances, contra property, although nonetheless reported together with different property, have an reverse kind of pure steadiness.
Contra legal responsibility, fairness, and income accounts have pure debit balances. These three forms of contra accounts are used to cut back liabilities, fairness, and income which all have pure credit score balances. Due to this fact, for these three, the debit steadiness truly represents a adverse quantity.
The Backside Line
Contra accounts are used to cut back the unique account instantly, retaining monetary accounting data clear. This enables for the straightforward willpower of historic prices. That is notably essential for contra asset accounts. The distinction between an asset’s steadiness and the contra account asset steadiness is the ebook worth.