The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet. Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt.
- The second method of estimating the allowance for doubtful accounts is the aging method.
- Although the car is normally an asset because you can sell it for parts or use it for your business, when the car depreciates to a zero or negative balance, it is a contra asset on your balance sheet.
- In a sales returns and allowances contra revenue account, you offset the balance in the sales revenue account.
- Including contra revenue accounts is important in the income statement because it shows the original amount of sales the firm has made, along with any factor that has reduced that amount.
- The main contra equity account is treasury stock, which is the balance of all stock repurchased by the company.
- In reality, the actual number of company discounts came closer to $5 thousand.
Popular Double Entry Bookkeeping Examples
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. As such, for an asset or expense account that is naturally a debit account, the contra accounts will be in a credit position.
Are Allowance for Doubtful Accounts a Current Asset?
All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. A business called Show-Fleur offers private driving tours of local botanical gardens — all from the comfort of high-end limousines. For its day-to-day operations, the business maintains a fleet of 75 identical 2016 Ford Explorer limousines, each initially retailing contra expense account at $150 thousand. However, these vehicles have experienced significant wear and tear in the intervening years. And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand. Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock.
Overview: What is a contra asset account?
Since it is a contra asset account, this allowance account must have a credit balance (which is contrary to the debit balances found in asset accounts). The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable. Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000. Given that liabilities have a credit balance, ensure that all your contra liabilities accounts have debit balances. Discount on notes payable and discount on bonds are examples of contra liability accounts. The most common contra account is the accumulated depreciation account, which offsets the fixed asset account.
But these items don’t retain that initial value; if liquidated, they would likely be sold at a loss. In order to record this ongoing value drop, you would use a corresponding contra account — an Asset Depreciation account. A contra account provides missing context by pairing it with a related account.
Understanding Contra Liability Accounts
An example of Accounts Payable (AP) is when a retail store orders inventory from a supplier. After receiving the goods, the store gets an invoice for $50,000, payable within 30 days. This $50,000 becomes part of the store’s accounts payable, representing a short-term liability on its balance sheet.
Do Contra Accounts Have Debit or Credit Balances?
The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting.
