In simpler words, contra account always has a negative balance to offset with paired asset account and shows the net balance of asset account in the balance sheet. Sale on account, which can also be known as a sale on credit or credit sales, refers to when businesses give a product over to a customer and customers do not have to pay until later. Credit sales are often risky because the chance of not collecting on the accounts receivable increases uncollectable percentages of credit sales, where the amount must be estimable and probable. Accounting for the contrary in a business will show the normal business account value, the attached contra account underneath it, with the net revenue the business experienced below.

Contra revenue accounts show the deducting adjustments to gross revenue or producing net revenue. Sales returned for a refund are posted to the contra account to reduce gross revenue or return on sales. The other side of the transaction is posted to cash because there is no value in retaining the sales transaction in the cash account. Accounting contra asset accounts or contra revenue accounts follow a simple double-accounting procedure to eliminate errors in financial reporting. The most common way to account for contra accounts is to attach the regular account with its connected contra account underneath it on a company’s balance sheet. For example, the depreciation value will be listed underneath the value of a vehicle, or the allowance of bad debts will be attached to the accounts receivable.

How and Why Contra Accounts Are Used

Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. If the above circumstance does not apply to your situation, you might require a new stock certificate transfer in your name from the company to regain your stocks. This helps the reader to know how many sales were actually made and how many customers had problems with the goods sold.

Both of these accounts offset each other to represent a net balance on a company’s balance sheet. For most companies, the contra asset accounts will also include several types. Before understanding contra asset accounts, it is crucial to learn what contra accounts are.

Understanding contra accounts

They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting. For instance, it is common to keep the purchase price of a piece of equipment as a historical cost in the debit asset account when it comes to fixed assets. Contra asset accounts are a type of contra account that net off against asset accounts.

Home Depot reports net receivables and net property and equipment, implying that both are reduced by contra assets. We’ll need to dig into the footnotes to find out what the contra accounts are. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean.

Contra Asset Journal Entry Accounting

Another example could be when a product is bought and is returned at face value because of a defect. The contra return on sales account will be debited while the normal cash account will be credited. An account with a balance that is the opposite of the normal balance. For example, Accumulated Depreciation is a contra asset account, because its credit balance is contra to the debit balance for an asset account.

Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period. These examples illustrate how contra accounts are used in various contexts to provide a more accurate picture of a company’s financial position and performance. Contra accounts are an essential component of the accounting process, designed to reflect the true value of assets, liabilities, equity, or revenue of a business.

Contra liabilities

In other words, the contra liability account is used to adjust the book value of an asset or liability. As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find. Companies bury them in the footnotes and often don’t break out the actual calculation. Still, it is important when possible to consider how the net accounts are calculated and be wary of companies that are reporting a ton of bad debts.

Allowance for receivables is an account that companies maintain to record possible bad debts. Any company that owns intangible assets such as software, patent, etc., will maintain an accumulated amortization account. Similar to depreciation, this account plays a significant free florist services invoice template role in representing the book value of a company’s assets. For example, a company has total fixed assets worth of $50,000 for the year ended 2019. For example, a company has an accounts receivable balance of $30,000 for the year ended 31st December 2019.

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