Types of Contra Accounts List of Examples Explanations Definition

Along with her writing work, Nora is an entrepreneur and consultant who opened an all-tap wine bar in New York’s East Village dubbed Lois and owns a sophisticated snack food business Aida. For her businesses, Nora is responsible for finances, marketing, operations, and fundraising. Along with The Balance, her writing has appeared in Thrillist, Insidehook and Vinepair. Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. Accumulated depreciation is the cumulative depreciation of an asset up to a single point in its life.

When a contra asset transaction is created, the offset is a charge to the income statement, which reduces profits. Debits and credits are traditionally distinguished by writing the transfer amounts in separate columns of an account book. Alternately, they can be listed in one column, indicating debits with the suffix “Dr” or writing them plain, and indicating credits with the suffix “Cr” or a minus sign. Despite the use of a minus sign, debits and credits do not correspond directly to positive and negative numbers. When the total of debits in an account exceeds the total of credits, the account is said to have a net debit balance equal to the difference; when the opposite is true, it has a net credit balance.

Does Issuing Common Stock for the Purchase of a Company Affect Retained Earnings?

A contra account reduces the reported balance for the paired account. Therefore, this account is the opposite of the amount reported in the original account.

Are prepared for various parties; some of them might not be accounting versed; they help identify the reduction in total value. Provision for a discount from creditors and discount on bills receivable are other widely used examples.

Contra Equity Account

Nova Incorporated is attempting to finalize their balance sheet in terms of the net value of their assets. At the end of the year, their assets are as follows… Nova Company valued a van at $30,000, an office building at $500,000 and office equipment at $20,000. At the same time, depreciation for the van at the end of the year ended up at $500. And the depreciation for the office equipment ended up at $1,000. A contra equity account reduces the total number of outstanding shares listed on a company’s balance sheet.

• For accounting purposes, the book value is realized by the difference between the asset’s account balance and contra account balance.
• For example, assume a company made $10,000 in sales on credit.
• Another contra asset account is Allowance for Doubtful Accounts.
• Sales Discounts –Sales discounts are offered on sales of goods to attract buyers.
• Examples are accumulated depreciation against equipment, and allowance for bad debts against accounts receivable.
• There is no reason for there to ever be a debit balance in a contra asset account; thus, a debit balance probably indicates an incorrect accounting entry.

Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value. For example, GAAP accounting requires fixed assets to be reported at cost on the balance sheet, but, over time, that value depreciates as the assets are used. The balance sheet will show a gross fixed assets value, a contra account value for accumulated depreciation, and a net value. All three values can be useful for investors depending on what they’re looking for. A contra asset account is an asset account with a natural credit balance. This account is paired with and offsets another asset account, so that a net balance is reported on the balance sheet. When a contra asset account is first recorded in a journal entry, the offset is to an expense.

What Other Types of Contra Accounts Are Recorded on the Balance Sheet?

Two common contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts represents the percentage of accounts receivable a company believes it cannot collect. Allowance for doubtful accounts offsets a company’s accounts receivable account. Accumulated depreciation offsets a company’s real property assets, such as buildings, equipment and machinery. Accumulated deprecation represents the cumulative amount of depreciation expense charged against an asset. All accounts also can be debited or credited depending on what transaction has taken place.

The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock. This use of the terms can be counter-intuitive to people unfamiliar with bookkeeping concepts, who may always think of a credit as an increase and a debit as a decrease. This is because most people typically contra asset account definition only see their personal bank accounts and billing statements (e.g., from a utility). A depositor’s bank account is actually a Liability to the bank, because the bank legally owes the money to the depositor. Thus, when the customer makes a deposit, the bank credits the account (increases the bank’s liability).

When a corporation buys back its shares that have been previously issued, it is recorded https://simple-accounting.org/ as a Treasury Stock. What are assets-in-place, growth options and non-operating assets?