What Is a Contra Account?
A contra account is used in a standard ledger to reduce the cost of a equivalent account when the two are netted together. A contra account’s natural balance is the opposite of the similar account. If a debit is the natural balance recorded throughout the equivalent account, the contra account data a credit score rating. As an example, the contra account for a troublesome and rapid asset is amassed depreciation.
Key Takeaways
- A contra account is an account used in a standard ledger to reduce the cost of a equivalent account.
- They are useful to deal with the traditional price in a major account while presenting a decrease or write-down in a separate contra account that nets to the current e guide price.
- Contra accounts are presented on the similar financial remark for the reason that similar account, maximum incessantly appearing directly below it with a third line for the internet amount.
- Bear in mind that accountants use contra accounts somewhat than reduce the cost of the original account directly to stick financial accounting data clean.
- Key examples of contra accounts include amassed deprecation and allowance for unsure accounts.
Understanding a Contra Account
Contra accounts are reported on the similar financial remark for the reason that similar account. As an example, a contra account to accounts receivable, continuously known as allowance for unsure accounts, is a contra asset account.
This kind of account might be known as the allowance for unsure accounts or dangerous debt reserve. The steadiness throughout the allowance for unsure accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. The amount is reported on the balance sheet throughout the asset section right away below accounts receivable. The web of the ones two figures is maximum incessantly reported on a third line.
Accountants use contra accounts somewhat than reduce the cost of the original account directly to stick financial accounting data clean. If a contra account is not used, it can be tricky to get to the bottom of historical costs, which can make tax preparation more difficult and time-consuming.
Thru conserving the original dollar amount intact throughout the unique account and reducing the resolve in a separate account, the financial wisdom is further transparent for financial reporting purposes. As an example, if a piece of heavy apparatus is purchased for $10,000, that $10,000 resolve is maintained on the customary ledger even for the reason that asset’s depreciation is recorded separately.
Contra accounts provide further part to accounting figures and reinforce transparency in financial reporting.
Kinds of Contra Accounts
There are 4 key sorts of contra accounts—contra asset, contra felony accountability, contra equity, and contra profits. Contra asset accounts include allowance for unsure accounts and amassed depreciation. Contra asset accounts are recorded with a credit score rating balance that decreases the steadiness of an asset.
A key example of contra liabilities include discount on notes or bonds payable. Contra liabilities grab a debit balance. Contra felony accountability accounts don’t seem to be as widespread as contra asset accounts.
A felony accountability that is recorded as a debit balance is used to decrease the steadiness of a felony accountability. The steadiness of a contra felony accountability account is a debit balance. This account decreases the cost of the felony accountability. Contra Felony accountability a/c is not used as ceaselessly as contra asset accounts. It is not categorized as a felony accountability as it does now not represent a longer term felony accountability.
The third contra type is contra equity. The ones contras reduce the equity account and carry a debit balance. Contra equity reduces the whole collection of outstanding shares on the balance sheet. The vital factor example of a contra equity account is Treasury stock, which represents the volume paid to buyback stock.
Now, for contra profits accounts there are product sales discounts, product sales allowances, or product sales returns. Contra profits reduced gross profits, resulting in internet profits. The ones contra profits accounts tend to have a debit balance.
Report a Contra Account
When a contra asset account is first recorded in {a magazine} get right of entry to, the offset is to an expense. As an example, an building up inside of the kind of a credit score rating to allowance for unsure accounts is also recorded as a debit to increase dangerous debt expense.
When accounting for property, the adaptation between the asset’s account balance and the contra account balance is referred to as the e guide price. There are two number one methods of working out what is going to must be booked proper right into a contra account.
The allowance means of accounting shall we in a company to estimate what proportion is reasonably priced to e guide into the contra account. The proportion of product sales means assumes that the company cannot gain price for a troublesome and rapid percentage of goods or products and services and merchandise that it has presented. Each and every methods result in an adjustment to e guide price.
As an example, a company has $40,000 worth of accounts receivable at September month-end. It estimates 10% of its accounts receivable it is going to be uncollectible and proceeds to create a credit score rating get right of entry to of 10% x $40,000 = $4,000 throughout the contra account, allowance for unsure accounts.
So as to balance the mag get right of entry to, a debit it is going to be made to the dangerous debt expense for $4,000. Even supposing the accounts receivable is not due in September, the company nevertheless has to file credit score rating losses of $4,000 as dangerous cash owed expense in its income remark for the month. If accounts receivable is $40,000 and allowance for unsure accounts is $4,000, the internet e guide price reported on the balance sheet it is going to be $36,000.
The ones which might be struggling with recording contra accounts would most likely have the benefit of the use of one of the vital an important best accounting tool in recent times available.
Fast Truth
The adaptation between an asset’s account balance and the contra account balance is known as the e guide price.
Example of a Contra Account
A large example of a contra account is the amassed depreciation. Yet again, amassed depreciation reduced mounted and capital asset balances. Apple breaks out its amount of property, plant, and power (PP&E) and then lists its amassed deprecation that reduces the PP&E resolve.
For fiscal 12 months 2021, Apple‘s gross PP&E (which accommodates land, buildings, apparatus, and plenty of others.) were given right here in at $109.7 billion. Within the intervening time, its amassed depreciation and amortization resolve is to be had in at $70.3 billion. This is how Apple harm it down in their annual file:
What Is the Benefit of Using a Contra Account?
Contra accounts are used to reduce the cost of the original account directly to stick financial accounting data clean. If a contra account is not used, it can be tricky to get to the bottom of historical costs, which can make tax preparation more difficult and time-consuming.
What Are the Different Kinds of Contra Accounts?
There are 4 key sorts of contra accounts—contra asset, contra felony accountability, contra equity, and contra profits. Contra property decrease the steadiness of a troublesome and rapid or capital asset, carrying a credit score rating balance. Contra liabilities reduce felony accountability accounts and carry a debit balance. Contra equity accounts carry a debit balance reduce equity accounts. Contra profits accounts reduce profits accounts and have a debit balance.
What Are Examples of a Contra Asset Account?
Key examples of contra asset accounts include allowance for unsure accounts and amassed depreciation. Allowance for unsure accounts reduce accounts receivable, while amassed deprecation is used to reduce the cost of a troublesome and rapid asset.
The Bottom Line
Contra accounts are used to reduce the original account directly, conserving financial accounting data clean. This allows for the easy choice of historical costs. This is specifically necessary for contra asset accounts. The adaptation between an asset’s balance and the contra account asset balance is the e guide price.
