Contra Liability Account: What it is, How it Works, Example

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The contra equity account treasury stock is reported right on the balance sheet.
For instance, to increase asset and expense accounts, we simply record a debit and to decrease those accounts, we can record a credit.
The amount in the accumulated depreciation account is deducted from the assets of a company, such as buildings, vehicles and equipment.
The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation.

What Is the Benefit of Using a Contra Account?

Namely, within a ledger, each account is intended to contain transactions and balances of a similar type only. But sometimes, dissimilar transactions are important to consider together within a ledger. A contra account is an asset account that is kept at either a negative or zero balance and is used on a balance sheet to offset the positive balance of a paired asset. To put it another way, a contra account is an account listed within a general ledger with the purpose of capturing the reduced value of a paired or related account when the two are added together.

Accounting made for beginners

Any unpaid bill or bad bet is the net accounts receivable, or the new total value of a company’s accounts receivable, when including the unpaid debt that is deemed to be uncollectible. Contra assets and contra liabilities are listed on a company’s balance sheet and carry balances opposite of their related accounts. Unlike regular assets and liabilities, contra assets typically keep a credit balance and contra liabilities typically keep a debit balance. contra expense account Managers and investors must understand contra accounts to accurately analyze a company’s balance sheet and determine the organization’s financial position. Contra asset accounts include allowance for doubtful accounts and the accumulated depreciation. Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements.

Example of Contra Expense Account

For example, if a company returns defective goods to a supplier, the value of the returned goods is credited to a purchase returns and allowances account, a type of contra expense account. This reduces the total cost of goods purchased, thereby adjusting the expense to reflect only the net cost. The mechanics of contra expense accounts involve debits and credits, similar to other accounts in double-entry bookkeeping. When an expense is initially recorded, it is debited to the relevant expense account. If a reduction or rebate occurs, a credit is made to the contra expense account, which offsets the original expense.

The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances.