Furthermore, these accounts are also crucial in allowing companies to record the original values for the paired accounts. The balance sheet shows the amount in the asset section underneath the accounts receivable. The net value of both these figures is usually reported on a third line. Accumulated Depreciation is a contra asset that pairs with Fixed Assets. Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset.

• A liability account typically has a credit balance, which means that an increase in the account is recorded as a credit and a decrease is recorded as a debit.
• Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt.
• When the amount recorded in the contra revenue accounts is subtracted from the amount of gross revenue, it equals the net revenue of a company.
• GAAP, the allowance for doubtful accounts represents management’s estimate of the percentage of “uncollectible” accounts receivable (i.e. the credit purchases from customers that are not expected to be paid).
• Therefore, having them separate can ensure companies can track these changes easily.

Contra-liability accounts differ from other types of accounts in that they have a debit balance instead of a credit balance. 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. 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.

Types Of Contra Account

Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. Of that amount, it is estimated that 1% of that amount will become bad debt at some point in the future. This means that the $85,000 balance is overstated compared to its real value. At this point, it isn’t known which accounts will become uncollectible so the Accounts Receivable balance isn’t adjusted. Instead, an adjusting journal entry is done to record the estimated amount of bad debt.

• 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.
• Namely, within a ledger, each account is intended to contain transactions and balances of a similar type only.
• 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.
• So an Accumulated Depletion account would serve as the contra for the parent Fixed Asset account.

Contra liability accounts are less commonly used than contra asset accounts. Contra liability accounts are mainly used by corporations that issue bonds frequently. That is because some of the bonds are issued at a discount, so this reduces the balance of their bonds payable.

How are contra accounts recorded?

The credit balance in the liability account Bonds Payable minus the debit balances in the contra-liability accounts Discount on Bonds Payable and Bond Issue Costs results in the carrying value or book value of the bonds. 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 equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares.

Understanding Contra Accounts

In short, it is not difficult to understand why the contra revenue has the opposite balance. Hence, the decrease in revenue will be recorded as a debit to the contra account. Make sure that you report contra accounts on the same financial statement as the related accounts. If you’re the one managing your company’s books of accounts, be sure to report the contra account on your financial statement on the line item directly beneath the main account. 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 account enables a company to report the original amount while also reporting the appropriate downward adjustment. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. In terms of the journal entries, the debit balance in “Discount on Bonds Payable” is subtracted from what is form 1120 the credit balance in the “Bonds Payable”. The first contra liability listed is an original issue discount (OID), a feature of debt financing wherein the issuance price is less than the redemption price. In short, in the example above it is distinguishable that the drawing account is reducing the balance of the equity account.

Contra Accounts

Hence, the company will have gross revenue or net sales equal to $9,900. A contra-liability account is one that is debited in order to offset a credit to another liability account. Contra liabilities are lower liability accounts and have a debit balance. For example, if a company has a $1,000 credit balance in its Accounts Payable account, it may create a contra liability account called Accounts Payable Offset. This account would have a $1,000 credit balance, offsetting the Accounts Payable account’s balance. Examples include accumulated depreciation, sales returns and allowances, and contra equity accounts like treasury stock.

Accumulated depreciation reflects the reduction in value of a fixed asset. Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement. Contra revenue accounts typically offset revenue accounts in a firm’s income statement. 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.

The Allowance for Doubtful Accounts is used to track the estimated bad debts a company my incur without impacting the balance in its related account, Accounts Receivable. An estimate of bad debts is made to ensure the balance in the Accounts Receivable account represents the real value of the account. Allowance for Doubtful Accounts pairs with the Bad Debts Expense account when doing adjusting journal entries.

What are the Contra Liabilities Account and its Examples?

A business called Show-Fleur offers private driving tours of local botanical gardens — all from the comfort of high-end limousines. For its day-to-day operations, the business maintains a fleet of 75 identical 2016 Ford Explorer limousines, each initially retailing at $150 thousand. However, these vehicles have experienced significant wear and tear in the intervening years. And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand. Master accounting topics that pose a particular challenge to finance professionals. Go a level deeper with us and investigate the potential impacts of climate change on investments like your retirement account.