The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. Examples of a contra revenue accounts include sales returns, sales discounts, and sales allowances. You debit the contra revenue accounts and credit the corresponding revenue accounts. For example, when you debit the balance in sales returns account, make sure that you offset the sales revenue account with a credit balance.

What Is the Benefit of Using a Contra Account?

Often when a company extends goods on credit, management expects some of those customers not to pay and so anticipates writing off bad debt. This type of account could be called the allowance for doubtful accounts or a bad debt reserve. The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible.

How to Use Contra Asset Accounts

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• It represents all the depreciation related to an asset or the company’s overall assets.
• The amount is not reported, and the net sales amount is reported on the income statement.
• Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available.
• The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment.

Conversely, for a contra asset account like depreciation, you would list all entries as a credit, carrying a negative total balance for the overall account. A liability that is recorded as a debit balance is used to decrease the balance of a liability. It is not classified as a liability since it does not represent a future obligation.

How Do You Record the Allowance for Doubtful Accounts?

The reason you show a contra asset on a balance sheet is so you can see the overall net balance of a particular asset and to give investors a more accurate look into your company’s financial activity. At Invoiced, we provide a suite of solutions that work together to make managing your invoicing, accounts receivable, and accounts payable seamless and easy. To convert your invoice management efforts to an electronic format that can easily share data with other financial systems, businesses can leverage Invoiced’s E-invoice Network. At contra account the same time, our Accounts Receivable Automation software and Accounts Payable Automation software makes tracking, managing, and processing crucial assets and liabilities — and their contras — easier than ever before. If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative. On the other hand, if you’re looking at a high-flying growth stock that reports new revenue growth records each quarter but has a massive allowance for doubtful accounts, there may be problems ahead.

Definition and Examples of Contra Assets

While assets have natural debit balances and increase with a debit, contra assets have natural credit balance and increase with a credit. Note that the debit to the allowance for doubtful accounts reduces the balance in this account because contra assets have a natural credit balance. Also, note that when writing off the specific account, no income statement accounts are used. This is because the expense was already taken when creating or adjusting the allowance. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. However, some asset accounts need a negative counterpart to reduce the balance of that account.

• When the balance in the accumulated depreciation is $10,000 and your equipment account has a debit balance of $50,000, then the book value of your equipment is $40,000.
• The revenue contra accounts Sales Returns, Discounts and Allowances are subtracted from the main Sales Revenue account to present the net balance on a company’s income statement.
• And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand.
• The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable.
• The contra asset account, accumulated depreciation, is always a credit balance.

• 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).
• Contra equity reduces the total number of outstanding shares on the balance sheet.
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• Instead, the existence of contra-asset accounts for companies will differ based on a company’s requirements.
• Overall, contra accounts are offsetting balances that are the opposite of specific accounts.
• Likewise, when you pay a bill, your cash account is reduced (credited) because you’re lowering the balance.

The net of the asset and its related contra asset account is referred to as the asset’s book value or carrying value. You record the allowance for doubtful accounts by debiting the Bad Debt Expense account and crediting the Allowance for Doubtful Accounts account. You’ll notice the allowance account has a natural credit balance and will increase when credited. The company now has a better idea of which account receivables will be collected and which will be lost. For example, say the company now thinks that a total of $600,000 of receivables will be lost.

Understanding Contra Liability Accounts