Contra Accounts Examples & How They Work

This account helps to give a more accurate picture of the company’s financial position. Brand owners need to manage conflict between their channel partners to ensure 6 tax tips for startups long-term engagement from the channel. Deal and design registration programs are examples of contra-revenue programs designed to manage channel conflict.

Accumulated depreciation is the total of all depreciation that has been charged to existing fixed assets such as equipment and buildings. There can be hidden value in stocks that have a lot of fully depreciated buildings. Companies like to depreciate assets as quickly as possible to get the tax savings, so the balance sheet may not state the true value of fixed assets. The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline. A https://adprun.net/11-revenue-models-examples-tips-for-startups-to/ account allows a company to see the original amount sold and to also see the items that reduced the sales to the amount of net sales. It is important to realize that unearned revenue is not a contra revenues account.

Contra accounts are worth a look

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. As mentioned, contra asset accounts are usually listed below their matching asset accounts, and the net values of those assets are written next to the contra accounts. Including 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.

Company K’s income statement will report the gross Sales of $100,000 minus the sales returns and allowances of $500 and the resulting net sales of $99,500. With contra equity accounts, you reduce the number of outstanding shares you list on your company’s balance sheet. Treasury stock and owner’s drawing account are examples of contra equity accounts.

Contra Asset Accounting & Examples

For example, a contra accumulated depreciation account can offset a fixed asset. Note that the contra liability account has a positive balance (a debit balance), and the liability account normally has a credit balance. Hence, the book value of the liability will be the credit balance of the liability account minus the debit balance of its contra liability counterpart. A contra asset account is an account in the balance sheet that offsets the balance of a regular asset account. The use of contra accounts ensures the accuracy of financial accounting records, as the value of the original accounts is not directly reduced.

For example, an accounts receivable’s contra account is a contra asset account. This type of account can also be called the bad debt reserve or allowance for doubtful accounts. The equity section of the balance sheet is where the shareholder’s claims to assets are reported. The main contra equity account is treasury stock, which is the balance of all stock repurchased by the company. When a company repurchases shares, it increases the fractional ownership of all remaining shareholders.

Contra Asset

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. In case a customer returns a product, the company will record the financial activity under the sales return account. The contra asset account carries a credit balance because an asset account usually has a debit balance. Such accounts are allowance for doubtful accounts and the accumulated depreciation account. Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance.

• 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).
• The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock.
• By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes.
• Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance.
• Deal and design registration programs are examples of contra-revenue programs designed to manage channel conflict.