And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand. Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock. This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders.
What is a contra account? 3 Examples of Contra Accounts
Generally speaking, the use of contra accounts is to ensure their related accounts stay clean and to keep track of historical cost easier. 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 those repurchased stocks. In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000. If the asset account had a credit balance or the contra asset account had a debit balance, this would indicate an error in the journal entries. The revenue contra accounts Sales Returns, Discounts and Allowances are subtracted from the main Sales Revenue account to present the net balance on a company’s income statement.
The Contra Equity Account
- Utilizing contra accounts in financial accounting has several significant advantages that enhance financial transparency and enable more effective financial management.
- Asset accounts usually have a positive value which is the same as a debit balance.
- 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.
- Both the asset and the corresponding contra asset accounts must be stated clearly in the balance sheet.
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When a contra asset account is first recorded in a journal entry, the offset is to an expense. 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. Contra equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock.
Contra liability account example
In its general ledger, the business will want to capture its gross sales figures and the actual value of the discount. An important function of contra accounts is to preserve the historical value in the main account while presenting a reduction in the net value. By recording the offset in a separate contra account, accountants can see how much of the value in the main account has been offset. At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset. 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.
Example #1: Revenue Contra Account
We will define what contra accounts are, the types of contra accounts and provide examples to illustrate. Each account in a general ledger will be designated debit or credit accounts depending on whether they’re categorized as assets, liabilities, revenues or expenses. For example, an asset was purchased by a company for $100,000 – that is, the historical cost of the asset was $100,000 – and its contra asset counterpart has a balance of $30,000. Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost. For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance. The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount.
In this way, the historical cost, the amount of write-off, and the book value of an asset can always be seen on the balance sheet. Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers. The amount is not reported, and the net sales amount is reported on the income statement. Providing sales allowance represents discounts given to customers to entice them to keep products instead of returning them. An item on one side of an account which offsets fully or in part on the opposite side of the same account is technically referred to as contra account.
Contra Account Example: Allowance for Doubtful Accounts
A contra asset account is not classified as an asset, since it does not represent long-term value, nor is it classified as a liability, since it does not represent a future obligation. By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company. For example, if a company just reported equipment at its net amount, users would not be able to observe the purchase price, the amount of depreciation attributed to that equipment, and the remaining useful life. Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset.
Income Statement: Definition, Types, Templates, Examples, and More
However, that $1.4 billion is used to reduce the balance of gross accounts receivable. Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount. For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account.
What are Contra Accounts?
There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra equity accounts carry a debit balance and reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance.
How to Record a Contra Account
The example for contra liability accounts includes, discount on bonds payable and discount on notes payable which carry normal debit balances. A business might elect to separately state contra asset accounts on its balance sheet, so that the users of its financial statements can obtain additional information about the contents of these accounts. Expense accounts are technically contra equity accounts because they are linked to another equity account, revenue, and maintain an opposite balance.