A contra expense account is an account used to reduce the amount of an expense without changing the balance in the main expense account. Examples of contra expense accounts include Purchase Returns, Purchase Discounts, and Advertising Reimbursements. Expenses are the bills and costs a business faces while trying to earn revenue. They show up on the income statement and play a big role in determining profit or loss. For example, if the balance of accumulated depreciation increases from $20,000 to $50,000, this means that the depreciation expense amounts to $30,000, which will be listed in the income statement. Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost.

Contra equity

The purpose of the Allowance for Doubtful Accounts is to track the reduction in the value of the asset while preserving the historical value of the asset. If you’re prepping for exams, accounting for leaving cert and accounting exam papers are your best friends. The main reason is to make the contra revenue account remaining shares more valuable, as their prices are expected to rise after the stock buyback. Contra accounts are confusing at first, but, with a little study, understanding them becomes second nature. Let’s go over how they work and what the main types are, and then finish with an example.

Liabilities

Another common contra liability account is a Discount on Bonds Payable account used by businesses that issue their own bonds. 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. A contra asset is paired with an asset account to reduce the value of the account without changing the historical value of the asset.

• 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.
• If this aligns with your business model, it’s advisable to document each refund, return, or discount in your contra revenue account.
• Properly documenting these contra accounts in your ledger can sometimes feel counter-intuitive since they operate in an opposite manner from their parent accounts.
• This, in turn, can impact profitability and provide a better picture of a business’s financial health.
• The purpose of the Allowance for Doubtful Accounts is to track the reduction in the value of the asset while preserving the historical value of the asset.
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The purpose of the Owner’s Withdrawal account is to track the amounts taken out of the business without impacting the balance of the original equity account. 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. Depending on what your business does, you might have other expense accounts too.

Our goal is to deliver the most understandable and comprehensive explanations of climate and finance topics. Carbon Collective is the first online investment advisor 100% focused on solving climate change. We believe that sustainable investing is not just an important climate solution, but a smart way to invest. 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). A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. It’s crucial to have an accounting and bookkeeping team (whether outsourced or internal bookkeeping) to help ensure accuracy for your contra account.

What Is a Contra Account?

• In case a customer returns a product, the company will record the financial activity under the sales return account.
• Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation.
• Rather than pay this cost up-front and tie up a significant chunk of capital, Show-Fleur makes this purchase on credit with a 90-day due date after invoicing.
• That is because some of the bonds are issued at a discount, so this reduces the balance of their bonds payable.
• When a company repurchases shares, it increases the fractional ownership of all remaining shareholders.
• For example, an asset was purchased by a company for $100,000 — that is, the historical cost of the asset was $100,000 — and its contra asset counterpart has a balance of $30,000.