Contra comes from a Latin contra meaning “against” or “opposition.” Contra revenue account usually means a deduction from the gross revenue, which results in net revenue. Copyright © 2021 AccountingCoach, LLC. What is a Contra Expense? Now that you have understood the contra account definition, you can summarize that contra account will always have a credit balance which will offset with paired asset account. When you add these two balances together, they offset each other, revealing the amount possible to collect in accounts receivable. Usually, the contra entries will appear in the following occasions. Contra in Latin means the opposite. Bad debt expense is an expense that a business incurs once the repayment of credit previously extended to a customer is estimated to be uncollectible. The amount due from the customer has been posted to the accounts receivable ledger, whereas the amount due to the … After some days M/s ABC & Co. return the construction equipment machines & $2000.00 due to defect in them. Contra entries are those entries in which same account can be debited and credited in contrary situation.For example we debit Bank account when depositing cash.At the same time we credit bank account when withdrawing money from bank. A contra account is the opposite of the normal balance that is actually shown by a particular type of an account. Definition: A contra account is a ledger account related to another specific ledger account. Error: You have unsubscribed from this list. In other words, any entry which affects both cash and bank accounts is called a contra entry. The opposite is true for a liability account. A drawing account acts as a contra account … A drawing account is a ledger that tracks money withdrawn from a business, usually a sole proprietorship or partnership, by its owner(s). Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000. Contra asset account is an asset account having credit balance which is related to one of the assets with debit balance and when we add the balances of two of these assets together, it will show us the net book value or carrying value of the assets having the debit balance. A contra account is an account whose balance is the opposite of a corresponding account. The use of a contra account allows a company to report the original amount and also report a reduction so that the net amount will also be reported. Contra Account Definition. Contra asset accounts are a type of asset account where the account balance may either be a negative or zero balance. A contra account's natural balance is the opposite of the associated account. Contra accounts are reported on the same financial statement as the associated account. For example, suppose a business has an amount of 1,000 owed by a customer for services provided on account, but also has an amount of 200 due to a supplier (in this case the customers business) for goods it has purchased. Therefore, if the Accounts Receivable has a debit balance of $40,000 and the allowance account has a credit balance of $2,000, the readers of the balance sheet will see that customers owe $40,000 for past purchases but the company does not expect to collect $2,000 of the $40,000. In the above case, the CR amount is $2000.00 which will be adjusted from sales to $15000.00 and in the accounting book sales to be recorded at $13000.00. The firm's cash is deposited in the bank. By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes. The net amount is often referred to as the carrying amount or perhaps the net realizable amount. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account. If a debit entry is recorded in an account, it will be recorded on the credit side and vice-versa. September 22, 2020 September 22, 2020 by Md. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense. Contra Revenue Accounts — Examples . This use of Sales Returns and Allowances (instead of debiting Sales) enables management to see that its customers had a problem with $3,000 of the company's goods. What is Contra: Contra means against. Analyzing the definition of key term often provides more insight about concepts. a. To illustrate, let's use the contra asset account Allowance for Doubtful Accounts. All the above-mentioned transactions are contra entry. These contra accounts examples include. Contra asset accounts are useful when in bookkeeping terms a business needs to keep the two accounts separate so as not to lose information, but for presentation reasons in the financial statements, it is necessary to offset them against each other and show a net balance. A contra account is an account used in a general ledger to reduce the value of a related account. A contra account is a general ledger account that offsets the balance of a corresponding account with which it’s paired. There are two major methods of determining what should be booked into a contra account. Knowing the balance between gross revenue and net revenue, and the cause of difference will surely benefit your business. The firm's cash is deposited in the bank. In Accounting terms, a contra account refers to an account which is balanced against an account. What is a Contra Account? The amount is reported on the balance sheet in the asset section immediately below accounts receivable. Allowance for doubt… Allowance for obsolete inventory or obsolete inventory reserve are also examples of contra asset accounts. In fact, as the name “contra” suggests, it is the opposite of a specific class of account. This account is not classified as an asset since it does not represent a long term value. The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold. Learn more. A drawing account acts as a contra account … In other words, the net accounts receivable amount. Share. Contra Asset Account Definition. They also allow us to follow the matching principle. He is the sole author of all the materials on AccountingCoach.com. Primary Sidebar. Contra Entry in Accounting: Definition, Example etc. This offer is not available to existing subscribers. Read more about the author. The use of a contra account allows a company to report the original amount and also report a reduction so that the net amount will also be reported. Even though they're listed in the assets section of the balance sheet where accounts are normally positive, contra assets represent negative amounts. Contra accounts allow us to report the true value of a organization’s assets. A contra liability account is paired with another liability account, and is used to reduce the balance in that account. This account reduces the total amount of equity held by a business. Debits and credits occur simultaneously in every financial transaction in double-entry bookkeeping. Contra comes from a Latin contra meaning “against” or “opposition.” Contra revenue account usually means a deduction from the gross revenue, which results in net revenue. Examples of Contra Asset Accounts an amount that is included in one part of a set of accounts as the opposite of an amount in the other part. All rights reserved.AccountingCoach® is a registered trademark. It is more popularly known as contra voucher. Another example is the owner's drawing account. A contra asset account is an asset account where the account balance is a credit balance. Contra account definition including break down of areas in the definition. An account whose value offsets the value of an equivalent account. Contra Entries. Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset. If you debit the contra account, ensure that you offset the related account with a credit balance. 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. In other words, any entry which affects both cash and bank accounts is called a contra entry. How to use contra in a sentence. contra entry definition: an amount that is included in one part of a set of accounts as the opposite of an amount in the…. It is not classified as a liability since it does not represent a future obligation. Where debit and credit are Cash or Bank A/c. https://www.myaccountingcourse.com/accounting-basics/contra-account In order to balance the journal entry, a debit will be made to the bad debt expense for $4,000. Here we discuss the list and examples of contra asset account along with advantages & disadvantages. This type of account could be called the allowance for doubtful accounts or bad debt reserve. A contra-balance is the amount in an account of a creditor that is the opposite of the usual balance of such an account. Debit and credit aspects of a single transaction are entered in the same account but in different columns. For example, Accumulated Depreciation is a contra asset account, because its credit balance is contra to the debit balance for an asset account. The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable. If the balance in your allowance for doubtful accounts has a credit of $1,000 and your accounts receivable has $20,000 in normal debit balance, then the net value of the receivables is $19,000. The contra asset account has credited balances that can reduce the balance in its paired asset account. The net amount is often referred to as the carrying amount or perhaps the net realizable amount. This type of account can equalize balances in the asset account that it is paired with on a business's balance sheet. This account decreases the value of a fixed asset. A contra account will naturally have an associated account, and the two accounts will have an opposite but equal balance. Another example of a contra account is allowance for doubtful accounts Allowance for Doubtful Accounts The allowance for doubtful accounts is a contra-asset account that is associated with accounts receivable and serves to reflect the true value of accounts receivable. It's contra asset account, called allowance for doubtful accounts, will have a credit balance. Contra accounts are presented on the same financial statement as the associated account, typically appearing directly below it with a third line for the net amount. Allowance for doubtful accounts – Allowance for doubtful accounts is the percentage of bad debts that are estimated from the Accounts receivable account. Examples of contra equity accounts are: Examples of Contra Accounts. What is a Contra Expense? It holds opposite sign for a particular type of account. If an account has a debit balance (e.g for an Asset a/c), then there will be a credit balance in a contra account. As illustrated in the above image, the following is th… A book value reduction takes place when writing down an asset's carrying value, based on changes in current market values. M/s L&T Limited sells the construction equipment machines to M/s ABC & Company for $15000.00 on Credit. A contra account is a general ledger account with a balance that is opposite of the normal balance for that account classification. Contra asset accounts are presented in a balance sheet to state the carrying amount of a specific asset, usually at which the contra-asset account is attached. To make the definition further simpler, any transactions involving a transfer of cash between one cash a/c to another or one cash a/c to another bank a/c or one bank account to another is called as a contra entry. Contra revenue is a deduction from the gross revenue reported by a business, which results in net revenue. Contra definition is - against —used chiefly in the phrase pro and contra. A contra expense is an account in the general ledger that is paired with and offsets a specific expense account. Contra asset accounts are a type of asset account where the account balance may either be a negative or zero balance. For instance, if a company has a plant asset such as Equipment with a debit balance of $92,000 and the account Accumulated Depreciation has a credit balance of $50,000, the carrying amount (or book value) of the equipment is $42,000. Contra accounts appear in the financial statements directly below their paired accounts. Contra Asset Account Examples . A second example of a contra asset account is Accumulated Depreciation. This means that the account has a net debit balance. A contra account reduces an associated account, in our case, the expense account. These accounts are used to reduce regular accounts’ balances. The word “contra” means “Opposite” which is a Latin word. Contra revenue accounts are commonly encountered, however, a business can also have other forms of contra accounts including: Contra asset account – for example, depreciation, allowance for doubtful debts. The opposite is true for a liability account. The balance of a contra asset accountis a credit balance. Since a debit balance in a liability account is contrary to the normal credit balance, the account is referred to as a contra liability account. Share. Definition. Contra Entry according to me is, If a transaction requires entries on both the debit and the credit sides simultaneously, it is called 'Contra entry'. Contra equity account definition December 28, 2020 / Steven Bragg. Businesses need to know what contra accounts are to keep accurate accounting records. A contra account is a general ledger account with a balance that is opposite of the normal balance for that account classification. This attachment is necessary since it functions hand-in-hand with a debit balance to fully disclose the total value of an asset and how much is its value with respect to time and other important variables. The contra asset account has credited balances that can reduce the balance in its paired asset account. Contra Liability Account: A liability account that is debited in order to offset a credit to another liability account. In other words, the account's credit balance is contrary to (or opposite of) the usual debit balance for an expense account. A contra account is used in a general ledger to reduce the value of a related account when the two are netted together. 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