Obsolete, Unsold and Unusable Inventory are contra asset accounts with a credit balance that reduce the normal debit balance of the main Inventory asset account in order to present the net value of inventory on a company’s balance sheet. Discount on Notes Receivable is a contra asset account with a credit balance that reduces the normal debit balance of its parent Notes Receivable asset account in order to present the net value of receivables on a company’s balance sheet. Discount on Bonds Payable is a contra liability account with a debit balance that reduces the normal credit balance of its parent Bonds Payable liability account in order to present the net value of payables on a company’s balance sheet.

Cash Flow Statement

For instance, when a company buys back their own shares, they register them in a ‘Treasury Stock’ contra equity account, which reduces total shareholders’ equity. contra expense account examples If a customer returns a product, the ‘Sales Returns’ contra revenue account lowers the total sales revenue, reflecting the true income. Contra asset examples like ‘Accumulated Depreciation’ reduce the value of fixed assets, showing their worth after usage over time. Contra liability, equity, and revenue accounts have natural debit balances. 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.

They ensure that the assets, revenues, and equity reported are not overstated, and that liabilities are presented in relation to any discounts or premiums. This transparency helps in accurate reporting, better decision-making, and instills greater confidence among investors and stakeholders. To properly account for this scenario in their books, the company must record the gross sales figure (which is the total sales revenue) and the value of the discount on early payments. Since these values are different in nature, the company must put them into two separate accounts. The Gross Sales account, which records the total sales revenue, would be paired with the Sales Discount account, which serves as the contra account for the Gross Sales account. Contra equity accounts, those intriguing components in the equity section of the balance sheet, reflect transactions that reduce the total equity available to shareholders.

List of Contra Accounts

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 equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock. Accounts receivable is rarely reported on the balance sheet at its net amount. Instead, it is reported at its full amount with an allowance for bad debts listed below it. Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off.

What’s the Significance of a Contra Account in Business?

If every single buyer had taken advantage of the early payment discount, the company would have provided roughly $5 thousand in discounts during that same timeframe. In reality, the actual number of company discounts came closer to $2 thousand. The difference between an asset’s account balance and the contra account balance is known as the book value.

Businesses benefit by forecasting more realistic revenue figures, which helps in strategic planning and maintaining investor confidence. Below is a break down of subject weightings in the FMVA® financial analyst program. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy. A contra account is an account listed within a general ledger with the purpose of capturing the reduced value of a paired or related account when the two are added together. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. When the two balances are offset against each other they show the net balance of both accounts.

1. Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt.
2. The contra asset account Accumulated Depreciation is deducted from the related Capital Assets to present the net balance on the parent account in a company’s balance sheet.
3. The Gross Sales account, which records the total sales revenue, would be paired with the Sales Discount account, which serves as the contra account for the Gross Sales account.
4. Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc.
5. Maintaining contra revenue accounts empowers you to maintain healthier and more realistic expectations of financial outcomes—no rose-tinted glasses here.

Enrich your expertise by diving into online courses that dissect advanced accounting concepts, many of which come with coveted CPE credits to boot. You could explore comprehensive webinars and workshops focused on the nitty-gritty of contra accounts. In addition, templates for contra account journal entries help ensure consistency and accuracy in recording transactions across the board.