For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets. However, that $1.4 billion is used to reduce the balance of gross accounts receivable. Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount. For this reason, contra accounts are primarily seen as how to raise funds for a new nonprofit having negative balances because they are used to reduce the balance of another account. The investors paid only $900,000 for these bonds in order to earn a higher effective interest rate. Company A recorded the bond sale in its accounting records by increasing Cash in Bank (debit asset), Bonds Payable (credit liability) and the Discount on Bonds Payable (debit contra-liability).

• Allowance for doubtful accounts represents the percentage of accounts receivable a company believes it cannot collect.
• Contra asset account examples include any transaction made on a contra account to balance out the debit account.
• A contra expense account will behave in the opposite way a normal expense account will; instead of debiting to increase, a contra account must credit to increase.
• Sales allowance represents discounts given to customers to entice them to keep products instead of returning them, such as with slightly defective items.

The sales discount account represents the discount amount a company gives to customers as an incentive to purchase its products or services. A contra entry is recorded when the debit and credit affect the same parent account and resulting in a net zero effect to the account. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Accumulated depreciation reflects the reduction in value of a fixed asset. Two common contra asset accounts include allowance for doubtful accounts and accumulated depreciation.

Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold. If the discount amount is immaterial, the parent and contra accounts can be combined into a one balance sheet line-item. Expenditures are recorded as prepaid expenses in order to more closely match their recognition as expenses with the periods in which they are actually consumed.

Contra Asset

Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete. Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods.

If a business were to not use the prepaids concept, their assets would be somewhat understated in the short term, as would their profits. The primary purpose of a Journal entries is to ensure the accuracy of financial records by capturing internal fund movements, transfers, and adjustments within the organization. This accuracy aids in generating precise financial statements and reports. The monthly accounting close process for a nonprofit organization involves a series of steps to ensure accurate and up-to-date financial records. Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset.

Purchase of Fixed Assets through Bank Payment

It is not classified as a liability since it does not represent a future obligation. A transaction is made under the sales return account when a customer returns a product to the company for a refund. Sales allowance represents discounts given to customers to entice them to keep products instead of returning them, such as with slightly defective items.

Free Financial Statements Cheat Sheet

In this scenario, a write-down is recorded to the 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. The Allowance for Doubtful Accounts is used to track the estimated bad debts a company my incur without impacting the balance in its related account, Accounts Receivable. An estimate of bad debts is made to ensure the balance in the Accounts Receivable account represents the real value of the account.

What is a Contra Expense?

For example, Accumulated Depreciation is a contra asset account, because its credit balance is contra to the debit balance for an asset account. This is an owner’s equity account and as such you would expect a credit balance. Other examples include (1) the allowance for doubtful accounts, (2) discount on bonds payable, (3) sales returns and allowances, and (4) sales discounts. For example net sales is gross sales minus the sales returns, the sales allowances, and the sales discounts. The net realizable value of the accounts receivable is the accounts receivable minus the allowance for doubtful accounts.

Cash Withdrawn from Bank:

For example, a grocery store displays advertisements for a national brand in its weekly flyer. The national brand gives the grocery store cash, reducing the overall cost of printing the flyer. The purpose of the Accumulated Depreciation account is to track the reduction in the value of the asset while preserving the historical cost of the asset.

Each year of an asset’s life, another year of Depreciation Expense is recorded. The offset to the Depreciation Expense account is Accumulated Depreciation. The amount is not reported, and the net sales amount is reported on the income statement. Contra liabilities are common in companies that sell bonds to raise capital.

Allowance for doubtful accounts represents the percentage of accounts receivable a company believes it cannot collect. The value of the asset is then replaced with an actual expense recorded on the income statement. A regular asset account typically carries a debit balance, so a contra asset account carries a credit balance.