Contra Account Definition, Types, and Example

Contra Account Definition, Types, and Example

Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. If you keep a lot of inventory in stock, chances are that some of the inventory will become obsolete. This frequently happens to manufacturing companies that sell products with an expiration date since any inventory remaining in stock past the expiration date quickly becomes obsolete. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.

The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. Assume a company has 100 clients and believes there are 11 accounts that may go uncollected. Instead of applying percentages or weights, it may simply aggregate the account balance for all 11 customers and use that figure as the allowance amount.

What are the types of Contra Asset Accounts?

Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock. This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders. Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values. He’s currently a VP at KCK Group, the private equity arm of a middle eastern family office. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions.

  • Two primary methods exist for estimating the dollar amount of accounts receivables not expected to be collected.
  • In other words, accumulated depreciation will be $10,000 each year until the car depreciates to $0 twenty years later.
  • It is critical that companies estimate their allowance for bad debt correctly; otherwise, the resulting expected future revenue will be incorrect.
  • Rather than pay this cost up-front and tie up a significant chunk of capital, Show-Fleur makes this purchase on credit with a 90-day due date after invoicing.

This process will give rise to a contra asset account which is the discount on notes receivables. Regardless of that, allowance for receivables accounts will exist for all companies that have account receivable balances. This account helps companies present a more accurate accounts receivable balance on the financial statements.

How to Account for the Allowance for Doubtful Accounts

Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets. In case the contra asset account is not listed in the balance sheet, it must be listed in the footnotes of the financial statement for the users to be informed. The allowance for doubtful accounts is a contra asset because it reduces the value of the accounts receivable (AR) account on the general ledger.

Accumulated Depreciation

As mentioned, contra asset 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.

Contra equity

These less-frequent contra accounts come into play when you need to account for changes in the outstanding liabilities for your business. For example, when your company borrows money, you would identify that debt in a Notes Payable account. Furthermore, if you subsequently pay off that debt early and capture a discount, the contra liability account — Discount Notes Payable — would record those savings. Another common contra liability account is a Discount on Bonds Payable account used by businesses that issue their own bonds. Put that contra asset accounts are accounts presented as deductions from the overall value of a particular asset. As the term suggests, it is the credit balance of a specific asset since assets are usually under debit accounts.

Contra accounts definition

Contra equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which what is bookkeeping represents the amount paid to buyback stock. The sales method applies a flat percentage to the total dollar amount of sales for the period.

What is Contra Account?

These accounts will typically help track sales discounts, product returns, and allowances (e.g., a price reduction for a good with minor defects). However, the details for contra accounts usually exist on the notes to the financial statements. However, these can cause a reduction in other balances on the statement. Writing off your obsolete inventory in this manner allows you to expense the cost of the obsolete inventory while also decreasing your current inventory balance using the contra asset account.