Mese: Dicembre 2019

You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy. Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com.

Non-operating revenue is listed after operating revenue on the income statement. Unlike the asset account, the natural balance of the revenue account is credit. Examples of contra accounts include allowance for doubtful accounts, reserve for obsolete inventory, and accrued liabilities. Each of these accounts helps to offset https://www.bookstime.com/ another account on the balance sheet. When recording assets, the difference between the asset’s account balance and the contra account balance is the book value of the asset. The “Accumulated Depreciation” line item is the contra asset account reflected on the balance sheet, but often they are combined as “PP&E, net”.

What are examples of contra accounts?

A liability that is recorded as a debit balance is used to decrease the balance of a liability. Allowance for doubtful accounts is netted from the accounts receivable balance. The company predicts which accounts receivable won’t be paid by customers and writes those off.

Consider what would happen if you have sales on credit that you reasonably expect will not be paid. In the example of Homes Inc. the percentage of customers defaulting on the account, and the amount defaulted, is contra revenue account estimable and probable. Past experience with uncollected bad debt has been, on average, 10% of credit sales. The sale to the Johnson family will create a bad debt expense estimate of 10% of the amount receivable.

Contra Account Examples

Unlike an asset which has a normal debit balance, a contra asset has a normal credit balance because it works opposite of the main account. A company might use a combination of different types of asset accounts, and the following six types of contra asset accounts can be used in conjunction with these fixed and current asset accounts. In this article, you will learn what a contra asset account is, the types of contra asset accounts a business may have as well as an example of how common types of contra asset account balances are calculated. The normal balance for asset and expense accounts is the debit side, while for income, equity, and liability accounts it is the credit side. An account’s assigned normal balance is on the side where increases go because the increases in any account are usually greater than the decreases. Contra assets and contra liabilities are listed on a company’s balance sheet and carry balances opposite of their related accounts. The contra revenue accounts commonly used in small-business accounting include sales returns, sales allowance and sale discounts.

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Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value.

• Examples of contra assets include Accumulated Depreciation and Allowance for Doubtful Accounts.
• THINKING is involved when making journal entries—you have to analyze what is happening and translate the transaction into accounting language by selecting accounts to debit and credit.
• The two common contra liability accounts, discount on bonds payable and discount on notes payable, carry normal debit balances.
• To drum up interest in the bond, the company will sell it at a discount.

The sales discount and sales return are Contra revenue accounts, as it decreases the sales revenue. In the example above, before returning goods by a customer sales were $50,000, after reducing $10,000 now sales revenue balance is $40,000. Moreover, the natural balance of sales revenue is credit in the balance sheet. Contrarily the sales return balance is debit in the balance sheet. Contra asset account examples include any transaction made on a contra account to balance out the debit account. Contra asset examples can be accumulated depreciation, discounts on notes receivable, trade accounts receivable, and obsolete inventory reserves.

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Some accountants will keep a reference handy to know if the debit increases or the credit increases an account. The normal balance of a contra account, and the debit or credit, will be the opposite of the entry and normal balance in the parent account. A contra account is where we record events that are contrary to a general ledger parent account, also called a relating account.