For this reason, https://bookkeeping-reviews.com/ accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. A major example of a contra account is the accumulated depreciation. Again, accumulated depreciation reduced fixed and capital asset balances. Apple breaks out its amount of property, plant, and equipment (PP&E) and then lists its accumulated deprecation that reduces the PP&E figure.
The account offsets the balance in the respective asset account that it is paired with on the balance sheet. A contra account is a balance sheet account that is used to offset a related asset, liability, or equity account.
How and Why the Contra Accounts are Used
The balance sheet impact includes the remaining account receivable after returns and the estimated uncollectible. If a listed company purchases its own shares from the open market, it will have to debit the treasury stock account in order to record the transaction. A company might decide to purchase its stock when the board of directors feel the stock is undervalued or when it wishes to pay its shareholders dividends. Put simply, contra accounts are used to reduce the normal accounts on the balance sheet.
- The other side of the transaction is posted to cash because there is no value in retaining the sales transaction in the cash account.
- Contra liability accounts are less commonly used than contra asset accounts.
- By reflecting both accounts on the balance sheet, analysts can understand both the original price and the total decrease in value of a certain asset over time.
- When a good is sold on credit, the amount receivable from customers is shown under the debtor’s balance sheet balance.
Therefore, for these three, the debit balance actually represents a negative amount. In order to balance the journal entry, a debit will be made to the bad debt expense for $4,000. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. 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. Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset.
Asset Contra Account
By the end of the first-year machinery, the balance will be $100,000, and accumulated depreciation will show $20,000. By the end of 2nd-year, the machinery balance will still be $100,000, and accumulated depreciation will show $40,000. The netbook value of the machinery by the end of the first year will be $80,000 ($100,000-$20,000) and $60,000 ($100,000-$40,000) by the end of the second year. This method helps a third person identify what the book value was at the time of purchase and the remaining value of an asset.
Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. The entry to remove the asset and its contra account off the balance sheet involves decreasing the asset’s account by its cost and decreasing the accumulated depreciation account by its account balance. The entry would consist of debiting a bad debt expense account and crediting the respective accounts receivable in the sales ledger. As mentioned, CA accounts usually have a negative value which is the same as a credit balance. That is to completely or partially offset the balance of their related asset accounts. Asset accounts usually have a positive value which is the same as a debit balance. Sale on account, which can also be known as a sale on credit or credit sales, refers to when businesses give a product over to a customer and customers do not have to pay until later.