What Are Contra Accounts? Definition, Types, and Examples

The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. 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. The accumulated depreciation account, which balances the fixed asset account, is the most typical contra account. A number of fixed assets are represented by their initial acquisition costs in the fixed asset account, and their cumulative depreciation is represented by their contra account (accumulated depreciation).

Examples of Contra Asset Accounts

On the other hand, depreciation expenses represent the assigned portion of a company’s fixed assets cost for a specific period. These expenses are recognized on the contra asset income statement as non-cash expenses that reduce the company’s net income or profit. From an accounting standpoint, the depreciation expense is debited, while the accumulated depreciation is credited. The calculated bad debts expense affects the income statement by recognizing an expense related to receivables that are unlikely to be collected. Concurrently, an allowance for doubtful accounts is established or adjusted, which is a contra-asset account that offsets the accounts receivable balance on the balance sheet.

• Examples of contra liability accounts include financing fees and original issue discounts (OID).
• The Allowance for Doubtful Accounts represents a contra asset account that reduces accounts receivable.
• (That is, you can have contra assets, contra liabilities, and contra equity.) In fact, contra accounts can even be reflected on the income statement in the form of contra revenue accounts.
• The company uses Straight-Line Depreciation to track the loss of value of the asset over time.
• The main contra equity account is treasury stock, which is the balance of all stock repurchased by the company.

What is a Contra Account?

For example, if a company has an asset account for accumulated depreciation, they would also have a contra asset account to offset the balance in the accumulated depreciation account. Contra equity accounts adjust the equity section of the balance sheet, reflecting changes in ownership interest. Treasury stock is a common contra equity account, representing shares repurchased from shareholders. These shares are recorded at cost and reduce total equity, impacting metrics like earnings per share (EPS) and return on equity (ROE). Share repurchases can be strategic, often used to return capital to shareholders or signal confidence in the company’s prospects.

Why Use a Contra Account?

• Contra assets are a rare exception as they are recorded as a credit balance and appear as a negative number.
• Properly documenting these contra accounts in your ledger can sometimes feel counter-intuitive since they operate in an opposite manner from their parent accounts.
• Suppose a company estimates that 5% of its $200,000 accounts receivable balance is uncollectible.
• He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own.
• A liability recorded as a debit balance is used to decrease the balance of a liability.
• 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 will decrease it.

The accumulated depreciation account is designed to reduce the carrying value of the fixed asset account when depreciation is recorded at the end of each period. The most common contra type, contra assets, records the loss in value of any asset accounts listed in your general ledger. And by comparing these contras against their corresponding parent accounts, you can better understand the actual value of the assets retained by your business. Because contra real estate cash flow asset accounts are used so frequently, it’s worth spending a little bit more time on them here, including common subtypes.

We get the remaining value of assets by deducting the accumulated depreciation balances from the book value of the asset. Contra asset account is an important element of the balance sheet or the books of accounts. This is because it tallies two respective debit-credit entry pairs, thereby figuring out the net balance of the asset account. Contra accounts help maintain the accuracy What is bookkeeping of financial records, provide transparency in reporting, and allow for proper tracking and analysis of specific transactions or events.