Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value. For example, GAAP accounting (or generally accepted accounting principles) requires fixed assets to be reported at cost on the balance sheet, but, over time, that value depreciates as the assets are used. The balance sheet will show a gross fixed assets value, a contra account value for accumulated depreciation, and a net value. All three values can be useful for investors depending on what they’re looking for.
Example of a contra account
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- The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock.
- Sometimes, we have an ancillary balance whose normal balance is the same as that of the parent account.
- The purpose of a contra expense account is to reduce the total expenses shown on the income statement by reflecting specific adjustments, recoveries, or reimbursements related to the expense.
- Contra revenue accounts reduce revenue accounts and have a debit balance.
This means that entries recorded on the left side of the T-account will increase the asset balance and entries recorded on the right side Online Accounting will decrease it. Contra asset accounts have a balance that is opposite from the regular asset accounts. In other words, a contra asset account maintains a credit balance instead of a debit balance.
Understanding Bad Debt Expense vs. Allowance for Doubtful Accounts
If a company has a high or fast-growing allowance as a percentage of accounts receivable, keep a close eye on it. To account for depletion, an Accumulated Depletion account contra expense accounts is created so that it can serve as a contra account for the parent Fixed Asset account. By creating Accumulated Depletion account, companies can reflect the reduction of the natural resource asset and the overall depletion costs in a more accurate way. By properly managing depletion accounting, companies in these industries can better track and allocate the costs and value of their natural resources.
Components of Contra Accounts
These accounts facilitate auditing and financial analysis by providing a detailed breakdown of adjustments made during a specific accounting period. This information assists auditors, and financial analysts in evaluating a company’s financial performance and risk exposure. In other words, contra revenue is a deduction from gross revenue, which results in net revenue. Contra accounts are confusing at first, but, with a little study, understanding them becomes second nature.
For instance, when a company records a rebate in a contra expense account, the net expense reported on the income statement is reduced. This reduction can lead to a more favorable view of the company’s profitability, as it shows that the company is effectively managing its costs. Additionally, the use of contra expense accounts can impact key financial ratios, such as the operating https://www.bookstime.com/ margin and net profit margin, by presenting a more accurate measure of the company’s financial performance. A contra asset account is an account that is used to offset another fixed asset account on the balance sheet. Contra asset accounts are typically used for accumulated depreciation, amortisation, and other accounting adjustments.
