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For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense. Now, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. When examining the term “contra asset account,” look no further than the root of contra to get a vague grasp of the definition. Because contra means “against,” one could quickly conclude that a contra asset account is going to be an account that goes against the regular asset account on the Balance Sheet.
A contra account is an account with a balance opposite the normal accounts in its category. Contra accounts are usually linked to specific accounts on thebalance sheetand are reported as subtractions from these accounts. In other words, contra accounts are used to reduce normal accounts on the balance sheet. For instance, the allowance for doubtful accounts reduces the net amount of accounts receivable, while the reserve for obsolete inventory does the same for inventory. Similarly, accrued liabilities reduce the total amount of current liabilities.
What Is a Contra Account & Why Is It Important?
Similarly, these accounts can also be essential in various calculations. 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. A contra asset account https://azbigmedia.com/real-estate/how-do-real-estate-accounting-services-improve-clients-finances/ is an account that opposes the balances of other asset accounts. As mentioned, a company will usually have debit balances in its asset accounts. Contra revenue accounts show the reduced gross income because certain asset expenses give a business a net revenue outlook.
Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock. The main reason is to make the remaining shares more valuable, as their prices are expected to rise after the stock buyback. Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values. If one account is debited for $100, then another account must be credited for the same amount.
Contra Account Definition, Types, and Example
Whenever the balance of a CA account increases , the increased amount is written off as an expense and is reported in the company’s income statement. Although they all aim at reducing the balance of some type of account, it is useful to have some general foundational knowledge of the different types of accounts. Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts. This helps the firms to evaluate the book value of their assets and liabilities.
- Contra liability, equity, and revenue accounts have natural debit balances.
- Contra accounts with small balances may not appear separately, but may be combined with the asset account, subtracting the contra balance from the asset balance.
- In the books, the account of the asset would have a debit value of $100,000, and the CA account would have a credit value of $30,000.
- Sales allowance reduces the selling price when a customer agrees to accept a defective unit instead of returning it to the seller.
- Another contra asset listed on the balance sheet is accumulated depreciation.