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When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense. In summary, contra accounts offer a way to accurately reflect reductions or adjustments in the value of specific accounts.

What is a Contra Asset Account? Definition, Types, Example, and More

Contra asset accounts can be used in a variety of areas, but there are three contra asset examples that you should pay close attention to. The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline. Including contra revenue accounts is important in the income statement because it shows the original amount of sales the firm has made, along with any factor that has reduced that amount. A contra revenue account plays a crucial role in accounting, providing valuable insight and transparency into financial records. In this article, I will explore the definition of a contra revenue account and provide real-world examples to help you better understand its significance.

Sometimes, it is important to keep the original balance of the accounts and create the contra accounts to be able to calculate the net value of the account. Whenever the balance of an account needs to be reduced in a company’s ledger, it is not always applicable to credit the account if it is an asset or debit the account if it is a liability. Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts. This helps the firms to evaluate the book value of their assets and liabilities. The difference between an asset’s account balance and the contra account balance is known as the book value.

Why should one include contra accounts on a balance sheet?

Contra equity accounts are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds. Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances. However, some asset accounts need a negative counterpart to reduce the balance of that account. The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. 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 credit balance in Notes Payable minus the debit balances in Discount on Notes Payable is the carrying value or book value of the notes payable. Sales returns, sales allowance and sale discounts are different examples of contra revenue accounts. Contra accounts such as these have a debit balance and are deducted from the total amount of a company’s revenue. Examples of revenue contra accounts are Sales Discounts, Returns and Allowances. Contra liability accounts such as discount on bonds payable and discount on notes payable usually carry debit balances.

Contra liability accounts

Typically, these notes reflect purchases made on credit by your customers. To obtain a cash payout before the note reaches maturity, you can sell these notes to a bank or other financial institution for some price below the note’s face value. A contra revenue represents any deductions or offsets that need to be removed from gross revenue to provide a clearer understanding of actual income  —  such as in the example just provided.

The account Allowance for Doubtful Account is credited when the account Bad Debts Expense is debited under the allowance method. 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. In response, the firm should decrease its accounts receivable and revenue balances.

However, there are some prevalent contra-asset accounts that may exist for all companies. This account offsets the balance in the respective asset account that they pair with on the balance sheet. You’ll continue to use contra asset account examples the contra asset account until the equipment has been completely depreciated, retired, or sold. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.

• In response, the firm should decrease its accounts receivable and revenue balances.
• 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.
• A contra account is used in a general ledger to reduce the value of a related account when the two are netted together.
• This discount is subtracted from the total amount borrowed to better reflect the discount given by the lender.