Contra Account Definition, Types, and Example

what is a contra

You’ll continue to use the contra asset account until the equipment has been completely depreciated, retired, or sold. If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts. For cash withdrawn from a bank for office use, the journal entry includes debiting the relevant office expense account and crediting the bank account. Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement. The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline. The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet.

How Does a Contra Account Work in Accounting?

They are instrumental in capturing financial positions of internal transfers, adjustments, and movements of funds, ensuring that financial records remain accurate and aligned. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. These contra revenue accounts tend to have a debit balance and are used to calculate net sales. In either case, using these accounts can help you better manage depreciation expense, keep your accounts receivable balance accurate, and properly dispose of and account for obsolete inventory.

Contra (video game)

what is a contra

Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount.

Understanding a Contra Account

  1. A key example of contra liabilities includes discounts on notes or bonds payable.
  2. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.
  3. The boss of the waterfall stage was also changed from a diamond-shaped sensor to an alien statue.
  4. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances.

Inventory obsolescence is an expense account, while the allowance for obsolete inventory is a contra asset account, which aims to reduce the inventory valuation on your balance sheet. The contra asset account, accumulated depreciation, is always a credit balance. This balance is used to offset the value of the asset being depreciated, so as of September 1, your $8,000 asset now has a book value of $7,866.67. Anytime you need to depreciate an asset, you’ll use an accumulated depreciation contra asset account, which records the amount of depreciation that has been expensed while offsetting the value of the asset being depreciated. Using the allowance for doubtful accounts, the contra asset account will more accurately reflect your true accounts receivable balance and make sure sure that your financial statements reflect the most accurate information possible. The arcade version of Contra consists of seven stages (the number of stages and level structures vary in later versions).

Mastering Financial Precision with Contra Entries

A Contra Entry signifies the simultaneous recording of a debit and a credit entry that counteract each other’s effects, ensuring that the financial equation remains balanced. The game can be played by one or two players, but due to the graphical limitations of the NES, Bill and Lance lost their individualized character designs. Instead, they are both depicted as shirtless commandos distinguished by the colors of their pants (blue for Bill and red for Lance). When one player loses all of their lives, they are given the option to use the other player’s stock to keep fighting.

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. 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.

Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset. Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. Your bank account, the inventory you currently stock, the equipment you purchase, and your accounts receivable balance are all considered asset accounts. Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Offsetting the asset account with its respective contra asset account shows the net balance of that asset.

The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account. The percentage of sales method assumes that the company cannot collect payment for a fixed accounts payable ap definition percentage of goods or services that it has sold. This account serves two purposes — tracking total depreciation expenses while providing you with the accurate book value of the asset being depreciated.

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For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately. A Contra Account is an account that holds transactions that offset or counterbalance the balance in another related account. It works to provide a clear picture of the net balance by presenting the difference between the two accounts.

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