What Is a Contra Account? Types + Examples

There are two major methods of determining what should be booked into a contra account. A contra account provides missing context by pairing it with a related account. So as values shift depending on real-world factors, rather than making deductions or adjustments to the original or “parent” account, you would record these changes in the contra account instead. By viewing these accounts — the parent and contra — in tandem, business owners can gain broader insights, preserve the historical figures stored in the parent account, and make accommodations for any relevant changes. Management may disclose its method of estimating the allowance for doubtful accounts in its notes to the financial statements. Assume a company has 100 clients and believes there are 11 accounts that may go uncollected.

What Are Examples of a Contra Asset Account?

And when your business still has some of these outdated, unwanted, or unusable items in your inventory, you’ll want to offset the lost value of these assets in your general ledger and balance sheet. So rather than adjusting your Inventory account, you would update its contra account — Obsolete Inventory. There is almost always a story behind data; a clarification or historical insight that changes the meaning behind raw figures.

How to Use Contra Asset Accounts

• By viewing these accounts — the parent and contra — in tandem, business owners can gain broader insights, preserve the historical figures stored in the parent account, and make accommodations for any relevant changes.
• By stating this information separately in a contra asset account, a user of financial information can see the extent to which a paired asset should be reduced.
• To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts.
• The matching principle states that revenue and expenses must be recorded in the same period in which they occur.
• A contra liability account is not classified as a liability, since it does not represent a future obligation.

The use of Allowance for Doubtful Accounts allows us to see in Accounts Receivable the total amount that the company has a right to collect from its credit customers. The credit balance in the account Allowance for Doubtful Accounts tells us how much of the debit balance in Accounts Receivable is unlikely to be collected. To offset what is a contra account 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. When combined, the AR account and the allowance for doubtful accounts contra assets offer a projection of how much net cash is expected to be received from outstanding accounts.

List of Contra Accounts

These are all examples of contra-asset accounts, which are the prevalent type of contra accounts. Most accountants choose to record the depreciation over the useful life of an item in the accumulated depreciation contra asset account, which is a credit account. The balance sheet would show the piece of equipment at its historical cost, then subtract the accumulated depreciation to reflect the accurate value of the asset. Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement. Contra revenue accounts typically offset revenue accounts in a firm’s income statement. Contra equity accounts are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds.

The allowance for doubtful accounts estimates the percentage of accounts receivable that are expected to be uncollectible. However, the actual payment behavior of customers may differ substantially from the estimate. There are three contra asset accounts that commonly appear in an organization’s chart of accounts. While tracking contra asset accounts is cumbersome for bookkeepers and accounting clerks using manual accounting systems, if you’re using accounting software you’ll find that most of the heavy lifting is done for you. You may not need to use contra asset accounts right now, but as your business grows, using contra asset accounts will likely become a necessity.

• Conversely, for a contra asset account like depreciation, you would list all entries as a credit, carrying a negative total balance for the overall account.
• However, it will also have a negative accumulated depreciation of $60,000, offsetting that cost.
• The use of a contra account allows a company to report the original amount and also report a reduction so that the net amount will also be reported.
• For example, based on previous experience, a company may expect that 3% of net sales are not collectible.
• Thus, a company is required to realize this risk through the establishment of the allowance for doubtful accounts and offsetting bad debt expense.
• The net of the asset and its related contra asset account is referred to as the asset’s book value or carrying value.

Establishing the Allowance

Accumulated depreciation is the most prevalent type of contra-asset account. It represents all the depreciation related to an asset or the company’s overall assets. Usually, companies add to the accumulated depreciation account after every accounting period. In essence, contra-asset accounts have a negative balance while other asset accounts have a positive balance.

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