An example of a contra liability account is the bond discount account, which offsets the bond payable account. The two accounts together yield the carrying value of the bond. A contra liability account is not classified as a liability, since it does not represent a future obligation. In finance, a contra liability account is one that is debited for the explicit purpose of offsetting a credit to another liability account. In other words, the contra liability account is used to adjust the book value of an asset or liability. Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance.

The Contra Equity Account

Companies that issue bonds are likely to use contra liability accounts. If the bond is sold at a discount, the company will record the cash received from the bond sale as “cash”, and will offset the discount in the contra liability account. The same is true for other asset accounts like accounts receivable. Accounts receivable is rarely reported on the balance sheet at its net amount. Instead, it is reported at its full amount with an allowance for bad debts listed below it.

What Is a Contra Liability Account

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What are Contra Accounts?

After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. Contra accounts are a little tricky to think https://www.kelleysbookkeeping.com/ about when you are first starting out. Just remember that they carry an opposite balance than the other accounts in their account type. When the company pays the cost of having the flyer printed, a journal entry is done.

Difference Between Depreciation, Depletion, Amortization

A contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability. Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset. Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets.

The amount is reported on the balance sheet in the asset section immediately below accounts receivable. The net of these two figures is typically reported on a third line. Of that amount, it is estimated that 1% of that amount will become bad debt at some point in the future. This means that the $85,000 balance is overstated compared to its real value. 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.

Contra equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. This means that entries recorded on the left side of the T-account will increase the asset balance and entries recorded on the right side will decrease it. Contra asset accounts have a balance that is opposite from the regular asset accounts. In other words, a contra asset account maintains a credit balance instead of a debit balance.

1. Accumulated Depreciation is a contra asset that pairs with Fixed Assets.
2. A second example of a contra asset account is Accumulated Depreciation.
3. Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement.
4. When a contra asset account is first recorded in a journal entry, the offset is to an expense.

A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. The purpose of the Sales Returns account is to track the reduction in the value of the revenue while preserving the original amount of sales revenue. We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R). Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching.

Equity and liability accounts both have contra accounts as well. Expense accounts are technically contra equity accounts because they are linked to another equity account, revenue, and maintain an opposite balance. Regular equity accounts, like revenue, maintain a credit balance. The expense account uses its debit balance to reduce the revenue account’s credit balance.

It carries a credit balance and is linked to the fixed asset account, which carries a debit balance. The accumulated depreciation account is designed to reduce the carrying value of the fixed asset account when depreciation is recorded at the end of each period. When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense.

There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra liabilities https://www.kelleysbookkeeping.com/how-to-file-federal-income-taxes-for-small/ reduce liability accounts and carry a debit balance. Contra equity accounts carry a debit balance and reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance.

Other examples include (1) the allowance for doubtful accounts, (2) discount on bonds payable, (3) sales returns and allowances, and (4) sales discounts. The contra accounts cause a reduction in the amounts reported. For example net sales is gross sales minus employer’s liability for employment taxes the sales returns, the sales allowances, and the sales discounts. The net realizable value of the accounts receivable is the accounts receivable minus the allowance for doubtful accounts. Assets aren’t the only account type that has contra accounts.