What Is a Contra Account? Types + Examples

This allows the company to accurately reflect the timing of the expense and the corresponding payment in its financial statements. For example, the account “Accrued Expenses Payable” is a liability account that has a credit balance. This means that when a company incurs an expense but does not pay for it immediately, it records the expense as a credit to the Accrued Expenses Payable account. The contra-liability account for Accrued Expenses Payable is “Accrued Expenses,” which has a debit balance.

  • This type of account could be called the allowance for doubtful accounts or a bad debt reserve.
  • To find out the current actual value of bonds payable the accountant would have to reduce the debit balance inside the contra liability account from credit balance of the particular liability account.
  • These accounts also ensure that you follow the matching principle in accounting, which states that you record expenses in the same period you incur them.

Carbon Collective partners with financial and climate experts to ensure the accuracy of our content. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. However, due to market conditions, Green Energy Corp. is only able to issue the bonds at 98% of their face value, meaning they receive $980,000 ($1,000,000 x 0.98) in proceeds from the bond issuance. Financing fees refer to the payments issued to the 3rd parties engaged when arranging debt financing, i.e. the administrative costs charged by the lender, lender legal fees, etc.

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These examples illustrate how contra accounts are used in various contexts to provide a more accurate picture of a company’s financial position and performance. At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset. For example, an asset was purchased by a company for $100,000 – that is, the historical cost of the asset was $100,000 – and its contra asset counterpart has a balance of $30,000.

  • This account is used to record the cumulative amount of depreciation taken on an asset, which can be reviewed in the balance sheet.
  • Contra liability accounts are a type of account in financial accounting that offset the balance of corresponding liability accounts.
  • A contra account is an asset account that is kept at either a negative or zero balance and is used on a balance sheet to offset the positive balance of a paired asset.
  • For its day-to-day operations, the business maintains a fleet of 75 identical 2016 Ford Explorer limousines, each initially retailing at $150 thousand.

Most other accounts, such as asset, revenue, and expense accounts, have a credit balance, which means that an increase in the account is recorded as a credit and a decrease is recorded as a debit. Contra-liability accounts, on the other hand, have a debit balance, which means that an increase in the account is recorded as a debit and a decrease is recorded as a credit. Contra-liability accounts are a type of account used in double-entry bookkeeping to offset the normal balance of a liability account.

Contra Liability Accounts

Nor would it count as a liability as it does not reflect a future obligation. 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. These accounts will typically how to create a location help track sales discounts, product returns, and allowances (e.g., a price reduction for a good with minor defects). A contra account is an asset account that is kept at either a negative or zero balance and is used on a balance sheet to offset the positive balance of a paired asset.

What are the Five Types of Contra Accounts?

For example, a grocery store displays advertisements for a national brand in its weekly flyer. The national brand gives the grocery store cash, reducing the overall cost of printing the flyer. This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders. Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at Scale Venture Partners, focused on technology.

Contra asset account example

These contra revenue accounts tend to have a debit balance and are used to calculate net sales. A contra liability account is paired with another liability account, and is used to reduce the balance in that account. In essence, the paired liability account contains a credit balance that signifies the presence of an obligation, while the contra account reduces the amount of that liability with a debit balance. A contra account may also have a zero balance, if no offset against a related liability account is currently needed.

However, the fundamental principle is that the contra account is used to offset the related main account, providing a more nuanced view of the company’s financial position. This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000. A customer returned $100 worth of items, claiming them to be defective. 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.

Carbon Collective is the first online investment advisor 100% focused on solving climate change. We believe that sustainable investing is not just an important climate solution, but a smart way to invest. Most often in such situations the amount of loan payable is reduced directly from loan payable account & a profit is shown on the Income statement of the business. For industries that rely on natural resources — mining, logging, oil, gas — depletion tracks the gradual exhaustion of the raw material in question, offsetting that loss in value against the initial appraisal of the land.

January 15, 2024


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