Contra Liability Definition + Journal Entry Examples

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. The accumulated depreciation account is a contra asset account on a company’s balance sheet. It appears as a reduction from the gross amount of fixed assets reported. Accumulated depreciation specifies the total amount of an asset’s wear to date in the asset’s useful life.

The granter may offer the company a discount if it repays the note early. The discount reduces the total amount of the note to reflect the discount given by the granter. You might have seen in the balance sheet; all the accounts are shown at the net value after all the adjustments. Let’s say, the value of machinery is shown after reducing the depreciation from it.

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In essence, the paired liability account contains a credit balance that signifies the presence of an obligation, while the contra account reduces the amount of that liability with a debit balance. A contra account may also have a zero balance, if no offset against a related liability account is currently needed. When a contra asset account is first recorded in a journal entry, the offset is to an expense.

This represents the cumulative amount of depreciation expense charged against an asset. If the balance in your allowance for doubtful accounts has a credit of $1,000 and your accounts receivable has $20,000 in normal debit balance, then the net value of the receivables is $19,000. Showing contra assets on your balance sheet allows potential investors to see how you write-down a depreciable asset, such as a piece of equipment. Contra assets give investors a better picture of how you use your assets over time. Overall, while maintaining contra accounts may require additional effort, the benefits they offer in terms of financial transparency and accountability make them an essential tool in accounting.

Understanding a Contra Account

A Contra Liability carries a debit balance rather than a credit balance, which is the opposite of the normal balance carried by liabilities. The allowance method of accounting enables a company to determine the amount reasonable to be recorded in the contra account. When recording assets, the difference between the asset’s account balance and the contra account balance is the book value of the asset. Creating allowances for doubtful accounts represents the percentage of accounts receivable a company believes it cannot collect.

• That is to completely or partially offset the balance of their related asset accounts.
• The company will likely combine the credit balance of $900,000 in the Sales account with the debit balance of $10,000 in the Sales Allowances account and report net sales of $890,000.
• Contra revenue accounts typically offset revenue accounts in a firm’s income statement.
• This presentation is rarely used, in favor of directly reducing the balance in the loan payable account and reporting the reduction as a gain on the income statement.

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. A delivery van is purchased by a business to use in delivering product and picking up materials. The company uses Straight-Line Depreciation to track the loss of value of the asset over time. In other words, contra revenue is a deduction from gross revenue, which results in net revenue.

Is a Contra Balances Negative or Positive?

At this point, it isn’t known which accounts will become uncollectible so the Accounts Receivable balance isn’t adjusted. Instead, an adjusting journal entry is done to record the estimated amount of bad debt. Accumulated Depreciation is a contra asset that pairs with Fixed Assets. Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset.

They serve an invaluable function in financial reporting that enhances transparency in accounting books. Bills payable or notes payable is a liability that is created when a company borrows any specific amount of money. If the company repays the loan early, the lender may provide a discount.

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This discount is subtracted from the total amount borrowed to better reflect the discount given by the lender. A company creates allowances for doubtful accounts to record the portion of accounts receivable which it believes it will no longer be able to collect. The amount in allowance for doubtful accounts is deducted from the accounts receivable account of a company.

• You may use accounting software packages, such as QuickBooks Online to set up contra accounts.
• There are two major methods of determining what should be booked into a contra account.
• When netted together, the two accounts yield the carrying value of a bond.
• Contra liability accounts are mainly used by corporations that issue bonds frequently.

In the event that a contra account is not utilized, it can become increasingly troublesome to determine historical costs, which makes tax preparation time-consuming and difficult. Put simply, waves version 9 contra accounts are used to reduce the normal accounts on the balance sheet. If the related account has a debit as the natural balance, then the contra account will record a credit.

What are examples of contra accounts?

The contra accounts in the balance sheet help the users of the financial statement to get complete information. If the values are reported at net value, the users may not able to see how each of the elements has performed over the years. The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable. It also shows the carrying (net) amount of $19,000, which you report to your firm’s balance sheet. By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount.