A second example of a contra asset account is Accumulated Depreciation. Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable. They are used in case some customers won’t be able to pay the money they owe to the business. As mentioned, contra asset accounts are usually listed below their matching asset accounts, and the net values of those assets are written next to the contra accounts.

• If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative.
• A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger.
• Between 2014 and 2018 gold moved sideways, and did not provide a safe haven during the 2015 stock market correction as gold also fell during that time.
• Learn why contra accounts, when utilized correctly along with a paired account, are a crucial component of accurate accounting and financial review.
• Contra assets are accounts in the general ledger—where you enter your transactions—that carry a balance used to offset the account with which it is paired.

Note that in accounting, the term “book value” is also used interchangeably with net value. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. In bookkeeping, a contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit (negative) balance. The account offsets the balance in the respective asset account that it is paired with on the balance sheet. Contra liability accounts are special accounts in the liabilities section of the balance sheet. This would let users of the financial statements calculate the book value of the liability.

The contra liability account would be used to offset the liability account on the balance sheet. An allowance for doubtful accounts is a contra asset account that is used to offset Accounts Receivable on the balance sheet. This account is used to estimate the amount of money that is not likely to be collected from customers. 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.

Thus, the natural balance of a contra account is always the opposite of the account with which it is paired. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities includes discounts on notes or bonds payable. Contra liability accounts are not as popular as contra asset accounts. The most common contra account is the accumulated depreciation account, which offsets the fixed asset account.

In footnote 3, the company reports, « Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021. » The S&P bottomed in early 2009 and continued to rise into 2019, with several corrections. Gold peaked between 2011 and 2012, and then went into a downtrend in 2013.

What is Contra in Accounting?

Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Therefore, a contra asset can be regarded as a negative asset account. Offsetting the asset account with its respective contra asset account shows the net balance of that asset.

• Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement.
• 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.
• The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount.
• Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values.
• As mentioned, contra asset accounts usually have a negative value which is the same as a credit balance.

Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances. However, some asset accounts need a negative counterpart to reduce the balance of that account. The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. 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.

Examples of Contra Accounts

An example of a contra liability account is the bond discount account, which offsets the bond payable account. A contra liability account is not classified as a liability, since it does not represent a future obligation. Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement. Contra revenue accounts typically offset revenue accounts in a firm’s income statement. Contra equity accounts are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds.

Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value. For example, GAAP accounting (or generally accepted accounting principles) requires fixed assets to be reported at cost on the balance sheet, but, over time, that value depreciates as the assets are used. The balance sheet will show a gross fixed assets value, a contra account value for accumulated depreciation, and a net value. All three values can be useful for investors depending on what they’re looking for. 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.

Contra revenue account

Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock. In the dual entry accounting system, a contra entry is an entry which is recorded to reverse or offset an entry on the other side of an account. If a debit entry is recorded in an account, it will be recorded on the credit side and vice-versa.

Contra Asset Journal Entry Accounting

Far less common is the obsolete inventory reserve, which reduces the overall inventory value on the balance sheet. This contra account holds a reserve, similar to the allowance for doubtful accounts. For each debit against the inventory account, there will be a corresponding credit against the obsolete inventory contra account. A Contra liability account is an account that is used to offset another liability account on the balance sheet. Contra liability accounts are typically used for bonds, notes payable, and other indebtedness.

The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold. 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. Sometimes, it is important to keep the original balance of the accounts and create the contra accounts to be able to calculate the net value of the account.

Revenue is shown on the income statement as a credit, it is the amount of revenue a business earns in a period. It might be important for a business to track the full cost of sales less contras to see the full picture. 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. A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity). The difference between an asset’s account balance and the contra account balance is known as the book value. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.

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. Contra liability accounts are less commonly used than contra asset accounts. Contra liability accounts are mainly used by corporations that issue bonds frequently. That is because some of the bonds are issued at a discount, so this reduces the balance of their bonds payable. They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting.

The chart below shows the SPDR S&P 500 ETF versus gold futures (blue line), with the bottom indicator showing the correlation between the two assets. One advantage of contra markets is that they tend to be out of favor when the broader market is doing well, which may provide some opportunities for value investors to snatch up some deals. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.

Contra liability accounts

It can help companies see the complete picture of their income and expenses and their equity or net worth. The allowance for doubtful accounts is used to reduce the net income by the estimated amount of uncollected receivables. This account helps to give a more accurate what is net income and how to calculate it picture of the company’s financial position. A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. The company may have multiple bank account so they will set up multiple chart account for each bank.

When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. Assume that a company uses a contra expense account to record the amounts that employees paid toward the company’s health insurance costs. For instance, the company might debit its expense account 4210 Employee Health Insurance Expense when recording the insurance company’s invoice of $10,000.