The credit balance in the account Allowance for Doubtful Accounts tells us how much of the debit balance in Accounts Receivable is unlikely to be collected. Companies record accounts receivable as assets on their balance sheets since there is a legal obligation for the customer to pay the debt. Furthermore, accounts receivable are current assets, meaning the account balance is due from the debtor in one year or less.

1. If a company has receivables, this means it has made a sale on credit but has yet to collect the money from the purchaser.
2. The company uses Straight-Line Depreciation to track the loss of value of the asset over time.
3. The national brand gives the grocery store cash, reducing the overall cost of printing the flyer.
4. Contra equity reduces the total number of outstanding shares on the balance sheet.

Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra revenue accounts reduce revenue accounts and have a debit balance. Contra asset contra expense account accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset.

Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. Another description of a contra expense account is an account that reduces or offsets the amounts reported in another general ledger expense account(s). In double entry bookkeeping terms, a contra expense account refers to an account which is offset against an expense account. These accounts work in the opposite direction of the expense account, and the control account will be Purchases. Because of the matching principle of accounting, revenues and expenses should be recorded in the period in which they are incurred. When a sale is made on account, revenue is recorded along with account receivable.

Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods. In this scenario, a write-down is recorded to the reserve for obsolete inventory. The purpose of a contra expense account is to record a reduction in an expense without changing the balance in the main account. The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account.

What is an example of a contra account?

The net balance of the accounts shows the net value of the purchases made by the business for the accounting period. 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 much of an asset was written off, its remaining useful life, and the value of the asset. Allowance for doubtful accounts (ADA) is a contra asset account used to create an allowance for customers that do not pay the money owed for purchased goods or services. The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables.

The benefit of using the contra expense account is that the company’s managers can see in account 4210 the total amount that the company paid to the health insurance company. 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).

Presentation of Contra Expenses

The net effect of the two accounts is a reduced total benefits expense for the company. Typically, a company fails to collect all of the money owed by customers making purchases on credit. The amount a company records as allowance for doubtful accounts is the amount from its accounts receivable the company considers uncollectible. Make sure that you report contra accounts on the same financial statement as the related accounts. If you’re the one managing your company’s books of accounts, be sure to report the contra account on your financial statement on the line item directly beneath the main account. When a contra asset account is first recorded in a journal entry, the offset is to an expense.

What is the Effect of Contra Accounts to the Balance of Related (Paired) Account?

When the company pays the cost of having the flyer printed, a journal entry is done. She scrutinizes each chandelier to ensure that she received correct models, and there are no damaged items. If the crystals are broken or chandelier is otherwise damaged, the owner returns the unsatisfactory items to the supplier. If the order comes late or the damage is small and repairable, she might decide to keep the thing in exchange for a purchase allowance. 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). Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.

Income Statement

Because there is an inherent risk that clients might default on payment, accounts receivable have to be recorded at net realizable value. The portion of the account receivable that is estimated to be not collectible is set aside in a contra-asset account called Allowance for doubtful accounts. At the end of each accounting cycle, adjusting entries are made to charge uncollectible receivable as expense. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline. A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity).

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 having negative balances because they are used to reduce the balance of another account. 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.

Contra Expense Account Explained

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. 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. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean.

A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping https://simple-accounting.org/ and introductory accounting. When the two balances are offset against each other they show the net balance of both accounts. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.

The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. A contra expense is an account in the general ledger that is paired with and offsets a specific expense account. The account is typically used when a company initially pays for an expense item, and is then reimbursed by a third party for some or all of this initial outlay. For example, a company pays for medical insurance on behalf of its employees, which it records in an employee benefits expense account. Then, when the employee-paid portion of the expense is paid to the company by employees, these reimbursements are recorded in a benefits contra expense account.