Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. An allowance for doubtful accounts is considered a “contra asset,” because it reduces the amount of an asset, in this case the accounts receivable. The allowance, sometimes called a bad debt reserve, represents management’s estimate of the amount of accounts receivable that will not be paid by customers. If actual experience differs, then management adjusts its estimation methodology to bring the reserve more into alignment with actual results.

A key example of contra liabilities include discount on notes or bonds payable. Contra liability accounts are not as popular as contra asset accounts. The two common contra liability accounts, discount on bonds payable and discount on notes payable, carry normal debit balances. The discount on bonds payable represents the difference between the amount of cash a company receives when issuing a bond and the value of the bond at maturity.

A final word about contra asset accounts

Then in account 4211 they can see the portion of the cost that was paid by the employees. The company's income statement will report the combination of the amounts in accounts 4210 and 4211 in order to show the company's actual expense of $8,000 ($10,000 minus $2,000). A revenues account with a debit balance instead of the usual credit balance. Examples include sales returns, sales allowances, and sales discounts. Inventory obsolescence is an expense account, while the allowance for obsolete inventory is a contra asset account, which aims to reduce the inventory valuation on your balance sheet.

• Contra expense accounts have a natural credit balance, as opposed to the natural debit balance of a typical expense account.
• A debit balance is a net amount often calculated as debit minus credit in the General Ledger after recording every transaction.
• Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.
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• Whether reported as separate lines on the financial report or as a cumulative value, the net amount of the pair of accounts is called the “net book value” of the individual asset.
• Allowance for doubtful accounts reduce accounts receivable, while accumulated deprecation is used to reduce the value of a fixed asset.
• The following entry should be done in accordance with your revenue and reporting cycles , but at a minimum, annually.

Accumulated depreciation offsets a company’s real property assets, such as buildings, equipment and machinery. Accumulated deprecation represents the cumulative amount of depreciation expense charged against an asset. The contra revenue accounts commonly used in small-business accounting include sales returns, sales allowance and sale discounts. A contra revenue account carries a debit balance and reduces the total amount of a company’s revenue.

Meaning of contra account in English

He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa. Hearst Newspapers participates in various affiliate marketing programs, which means we may get paid commissions on editorially chosen products purchased through our links to retailer sites. We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R). Explain whether an error has occurred if a post-closing trial balance includes a Depreciation Expense account. Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years.

By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company. Contra asset accounts allow users to see how contra expense account much of an asset was written off, its remaining useful life, and the value of the asset. This depreciation is saved in a contra asset account called accumulated depreciation.