The company has a contra asset account for accumulated depreciation expense and a separate asset account for equipment cost. The contra asset account would be used to offset the equipment account on the balance sheet. This would give a more accurate picture of the company’s assets.

This would give a more accurate picture of the company’s equity. A contra equity account is an account that is used to offset another equity account on the balance sheet. Contra equity accounts are typically used for a company to buy back its stock or shares. Sometimes, the current value of a note receivable will fall compared to its face value.

What is Contra in Accounting?

The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. Companies are recommended to use contra asset accounts for their fixed assets. It’s highly likely that your books will benefit from this How to attract startups for accounting process in terms of clarity, transparency, and the amount of time it takes to do accounting. Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Therefore, a contra asset can be regarded as a negative asset account.

As mentioned, companies do not represent these accounts on the balance sheet. However, they will still appear on the notes to the financial statements with necessary disclosures. On the other hand, accumulated depreciation is a contra-asset account.

Contra Account Definition in Accounting

The purpose of a contra asset account is to store a reserve that reduces the balance in the paired account. By stating this information separately in a contra asset account, a user of financial information can see the extent to which a paired asset should be reduced. In response, the firm should decrease its accounts receivable and revenue balances. That is done by crediting accounts receivable by $100 and debiting the contra revenue account sales returns and allowances for $100. Hence, the company will have gross revenue or net sales equal to $9,900. Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks.

These accounts can significantly reduce balances on the balance sheet. Likewise, when you pay a bill, your cash account is reduced (credited) because you’re lowering the balance. A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity). The proper size of a contra asset account can be the subject of considerable discussion between a company controller and the company’s auditors.

Contra Revenue Account

The auditors want to ensure that reserves are adequate, while the controller is more inclined to keep reserves low in order to increase the reported profit level. A contra account is an account with a balance opposite the normal accounts https://accounting-services.net/what-is-accounting-for-startups/ in its category. Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts. In other words, contra accounts are used to reduce normal accounts on the balance sheet.

• Contra equity accounts are typically used for a company to buy back its stock or shares.
• It would give a more accurate picture of the company’s fixed assets.
• A contra account carries a balance that is opposite to the normal balance of its related main account.
• Companies that hold inventories for a long time may face accumulating obsolete inventory.
• Contra accounts are used to offset each other and reduce the gross amount.

Contra asset accounts have a credit balance as compared to a debit balance that most other types of accounts have. Before we start talking about the finer details, it’s important to know what is a contra asset account. Another contra asset account is Allowance for Doubtful Accounts. This account appears next to the current asset Accounts Receivable.