contra account definition and meaning

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. Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement. The “Accumulated Depreciation” line item is the contra asset account reflected on the balance sheet, but often they are combined as “PP&E, net”.

A contra account is used to record adjustments and transactions that have an opposing impact to report the true value of a firm’s financial statements. Contra accounts are commonly found on general ledgers where define contra account all of a business’s accounts and transactions are organized on a master list. The contra account is used to report the correct assets while preserving the transactions and balance of the relating account.

CREDIT CARDS

Contra accounts such as these have a debit balance and are deducted from the total amount of a company’s revenue. Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances.

• A key example of contra liabilities include discount on notes or bonds payable.
• Allowance for doubtful accounts reduce accounts receivable, while accumulated deprecation is used to reduce the value of a fixed asset.
• The contra asset account carries a credit balance because an asset account usually has a debit balance.
• Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods.
• A transaction is made under the sales return account when a customer returns a product to the company for a refund.

A contra account is a special type of account that reduces the value of another account. For example, if you have an account for your car worth $10,000, you might also have a contra account for depreciation that reduces the value of your car account over time. 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.

Example of a Contra Account

Instead of debiting the asset account directly, the contra asset account balance will be credited separately. A contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit balance. The account offsets the balance in the respective asset account that it is paired with on the balance sheet. Balance Sheet AccountsA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.