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There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra liabilities reduce liability accounts and carry https://www.good-name.org/how-accounting-services-can-help-real-estate-companies-optimize-their-finances/ a debit balance. Contra equity accounts carry a debit balance reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation.
A contra account is used for account classification and is also reported in a company’s financial statement alongside its corresponding or related account. When reporting a contra account in a company’s financial statement, it is reported immediately below the account it relates to or corresponds. Contra accounts have different names depending on the account they correspond. For instance, a contra account that relates to an accounts receivable is called a contra asset account.
Examples of contra asset account in the following topics:
The adjusted trial balance lists the account balances segregated by assets and liabilities. The accounts on the left side of the accounting equation are reported on the left side of the balance sheet. If a company uses the contra account Accumulated Amortization, this account will typically be shown on the balance sheet. The allowance method of accounting enables a company to determine the amount reasonable to be recorded in the contra account.
Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. These contra revenue accounts tend to have a debit balance and are used to calculate net sales. In accrual-basis accounting, recording the allowance for doubtful retail accounting accounts at the same time as the sale improves the accuracy of financial reports. The projected bad debt expense is properly matched against the related sale, thereby providing a more accurate view of revenue and expenses for a specific period of time.
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They serve an invaluable function in financial reporting that enhances transparency in accounting books. There are many situations where one account is used to offset another account. One common example is accumulated amortisation, which is a contra-asset account. This means that it acts in the opposite manner of a regular asset account. Contra revenue account, which is used to record the net amounts and usually has a debit balance, as opposed to the revenue account that records the gross amounts. The increase in the accumulated depreciation account reduces the asset to its current book value .