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. A contra account is a general ledger account with a balance contra definition accounting that is opposite of the normal balance for that account classification. 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.
A contra account balances the numbers from two or more accounts that are compared on the balance sheet. Normal accounts on the general ledger will usually have a debit balance, while contra accounts are typically either zero or hold a negative credit balance. This depreciation is saved in a contra asset account called accumulated depreciation. The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment. The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation.
Contra Account in Business Accounting
Contra assets are credit accounts that carry their own values that when combined with the value of the paired account, informs the balance sheet. Sales Returns-Sales returns is a Contra Ac of the sales account. This transaction records when a customer returns the paid goods, and a refund must be given. The discount offered on the liability created when a company borrows a specific amount of money and repays it early. Discount on notes payable reduces the total amount of the note to reflect the discount offered by the lender.
Debit balances are normal for asset and expense accounts, and credit balances are normal for liability, equity and revenue accounts. When a particular account has a normal balance, it is reported as a positive number, while a negative balance indicates an abnormal situation, as when a bank account is overdrawn. In essence, contra asset accounts have a negative balance while other asset accounts have a positive balance. Both of these accounts offset each other to represent a net balance on a company’s balance sheet. Business owners should understand the functions of contra accounts and their significance to keeping accurate financial records. Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable.
A contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit balance. The account offsets the balance in the respective asset account that it is paired with on the balance sheet. Far less common is the obsolete inventory reserve, which reduces the overall inventory value on the balance sheet. This contra account holds a reserve, similar to the allowance for doubtful accounts.
A contra asset account is not classified as an asset, since it does not represent long-term value, nor is it classified as a liability, since it does not represent a future obligation. Accumulated depreciation is the most prevalent type of contra asset account. It represents all the depreciation related to an asset or the company’s overall assets. Usually, companies add to the accumulated depreciation account after every accounting period.
What is the meaning of Contra with example?
contra- prefix. : against : contrary : contrasting. : pitched below normal bass. contrabassoon.