Can you explain me ‘contra asset’ account in accounting in the most simplest way possible?

The contra accounts make financial statements more user-friendly, help preparers complete annual filings, and are globally accepted accounting policies. Examples of revenue contra accounts are Sales Discounts, Returns and Allowances. A liability recorded as a debit balance is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as contra asset accounts. It is not classified as a liability since it does not represent a future obligation.

• Contra asset accounts can be used in a variety of areas, but there are three contra asset examples that you should pay close attention to.
• The first time a contra asset account is recorded in a journal entry, it is to be deducted from the expense.
• There are many situations where one account is used to offset another account.
• Accumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date.
• These accounts can be listed based on the respective asset, liability, or equity account to reduce their original balance.

You must also report the amount that you can reasonably expect will not be paid, if it is estimable and probable. You could simply adjust the parent account…but then you are missing an essential part of the story — how many patients were actually treated today for a sprain. To report the real value of the financial statement, you will need to record the amount you can reasonably construction bookkeeping estimate that will probably effect the financial statement classification. In other words, contra revenue is a deduction from gross revenue, which results in net revenue. Emilie is a Certified Accountant and Banker with Master’s in Business and 15 years of experience in finance and accounting from corporates, financial services firms – and fast growing start-ups.

What Are the Consequences of Overstating Your Accounts Receivable?

Your bank account, the inventory you currently stock, the equipment you purchase, and your accounts receivable balance are all considered asset accounts. To offset this, the allowance for doubtful accounts balance is adjusted via a credit, while the bad debt account is debited to balance out the AR account. When combined, the AR account and the allowance for doubtful accounts contra assets offer a projection of how much net cash is expected to be received from outstanding accounts. Contra liability accounts such as discount on bonds payable and discount on notes payable usually carry debit balances.

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. A contra account is an account used in a general ledger to reduce the value of a related account. Land does not have accumulated depreciation, because land account is not depreciated. Sales discounts are when the company reduces the price of a certain product whenever the customer completes the payment early.

Liability Contra Account

Fixed assets are often listed on the balance sheet as property, plant and equipment. The accumulated depreciation account appears on the balance sheet as a credit and is a reduction from the total amount listed for fixed assets. Some companies choose not to include accumulated depreciation on the balance sheet and simply list the net amount of property, plant and equipment. Although contra asset accounts have credit balances, they do not appear in liabilities or equity.

The most common contra equity account is called “treasury stock.” This special account decreases the number of shares outstanding in the market because the company repurchases some of the shares from its buyers. Therefore, it reduces the value of shareholders’ equity by the amount paid for https://www.icsid.org/business/managing-cash-flow-in-construction-tips-from-accounting-professionals/ those repurchased stocks. Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets. In case the CA account is not listed in the balance sheet, it must be listed in the footnotes of the financial statement for the users to be informed.

Contra equity accounts

The accumulated depreciation amount shows how much depreciation expense has been charged against an asset. Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value. Put simply, contra accounts are used to reduce the normal accounts on the balance sheet. If the related account has a debit as the natural balance, then the contra account will record a credit.