Contra Accounts: Definition, Types, Example The Motley Fool

Adhering to guidelines such as those outlined in ASC Topic 326 on credit losses under U.S. GAAP or IFRS 9 for financial instruments ensures consistency and compliance. Contra accounts are integral to financial statements, offsetting specific accounts to present a clearer view of a company’s financial position. Under Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), these accounts adjust the gross amounts of assets, liabilities, and equity for accurate net values. Sometimes, the current value of a note receivable will fall compared to its face value. This process will give rise to a contra asset account which is the discount on notes receivables.

In liabilities, contra accounts like discount on bonds payable reduce the carrying amount of bonds, aligning recorded liabilities with the actual amount owed. Equity accounts also have contra counterparts, such as treasury stock, representing the cost of repurchased shares and reducing total equity reported. A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet. Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt. contra asset accounts These less-frequent contra accounts come into play when you need to account for changes in the outstanding liabilities for your business.

Examples of revenue contra accounts are Sales Discounts, Returns and Allowances. The most common contra type, contra assets, records the loss in value of any asset accounts listed in your general ledger. And by comparing these contras against their corresponding parent accounts, you can better understand the actual value of the assets retained by your business. Because contra asset accounts are used so frequently, it’s worth spending a little bit more time on them here, including common subtypes.

Contra Account Definition, Types, and Example

The bond is listed on the balance sheet at the full amount of $1,000, but the cash received is just $950, so a contra liability for the discount is listed to make the entry balance. Accumulated depreciation is the total of all depreciation that has been charged to existing fixed assets such as equipment and buildings. There can be hidden value in stocks that have a lot of fully depreciated buildings. Companies like to depreciate assets as quickly as possible to get the tax savings, so the balance sheet may not state the true value of fixed assets. At Invoiced, we provide a suite of solutions that work together to make managing your invoicing, accounts receivable, and accounts payable seamless and easy.

For stakeholders, looking at both accounts is also crucial in their decision-making process. In other words, contra revenue is a deduction from gross revenue, which results in net revenue. In footnote 3, the company reports, “Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021.” Contra accounts are confusing at first, but, with a little study, understanding them becomes second nature. Let’s go over how they work and what the main types are, and then finish with an example. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting.

Contra account examples

He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

• The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold.
• Since a counter asset account does not represent long-term capital gains, it is not categorized as an asset.
• However, that $1.4 billion is used to reduce the balance of gross accounts receivable.
• The treasury stock account, which is a deduction from equity since it represents the sum paid by a firm to purchase back its stock, is an example of a counter account within equity.
• By recording the offset in a separate contra account, accountants can see how much of the value in the main account has been offset.
• The two most common examples of contra asset accounts are the accumulated depreciation contra account, and the allowance for doubtful debts contra account.

Financial Planning and Analysis (FP&A)

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#2 – Contra Liability

As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find. Companies bury them in the footnotes and often don’t break out the actual calculation. Still, it is important when possible to consider how the net accounts are calculated and be wary of companies that are reporting a ton of bad debts. The Notes Receivable account documents the total value of any promissory notes held by the company. Typically, these notes reflect purchases made on credit by your customers.

Usually, companies add to the accumulated depreciation account after every accounting period. Similarly, allowance for receivables will pair with accounts receivable balances. While accumulated depreciation is the most common contra asset account, the following also may apply, depending on the company. A less common example of a contra asset account is Discount on Notes Receivable. The credit balance in this account is amortized or allocated to Interest Income or Interest Revenue over the life of a note receivable.

Therefore, these companies must maintain an obsolete inventory reserve account to net off any unusable stock from the account. The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount. This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms. Most accounts receivable would just be the time between purchase and credit card settlement. 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. If every single buyer had taken advantage of the early payment discount, the company would have provided roughly $10 thousand in discounts during that same timeframe.

Overall, contra accounts are offsetting balances that are the opposite of specific accounts. There are several examples of contra accounts, including accumulated depreciation, accumulated depletion, accumulated amortization, allowance for receivables, etc. These are all examples of contra-asset accounts, which are the prevalent type of contra accounts. Contra asset accounts adjust the value of a company’s assets to provide a more accurate depiction of their worth.

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• To offset this, the allowance for doubtful accounts balance is adjusted via a credit, while the bad debt account is debited to balance out the AR account.
• These examples illustrate how contra accounts are used in various contexts to provide a more accurate picture of a company’s financial position and performance.
• Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance.
• So an Accumulated Depletion account would serve as the contra for the parent Fixed Asset account.

Small Businesses

Instead, it is reported at its full amount with an allowance for bad debts listed below it. Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing 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 asset. The following are examples of commonly-used contra asset accounts you could create to better understand your business financials. However, it’s important to keep in mind that you can create any contra account you want to more clearly describe your business — this is not an exhaustive or definitive list.