List of Current Liabilities: Examples and Key Categories Explained

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. Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset. Explore the purpose and types of contra accounts in financial statements, enhancing clarity and accuracy in financial reporting. Proper management of unearned revenues ensures accurate financial reporting and transparency. Businesses must allocate these revenues across periods in which goods or services are delivered.

• The balance sheet shows the amount in the asset section underneath the accounts receivable.
• The amount on the equity contra account is deducted from the value of the total number of outstanding shares listed on a company’s balance sheet.
• 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.
• Maintaining an accurate accounts payable ledger is essential for financial reporting and compliance with accounting standards like GAAP or IFRS.
• If every single buyer had taken advantage of the early payment discount, the company would have provided roughly $5 thousand in discounts during that same timeframe.
• Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance.

Tools and Resources for Contra Account Management

Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account. The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that is it better to buy a freehold or a leasehold it has sold. Similarly, if the parent account lists entries as debits, the contra account will appear as a credit. As your business acquires new assets (e.g., machinery, office equipment, vehicles), you record the initial purchase value in your Fixed Asset account.

Tricky Question: Is Unearned Revenue a Contra Account?

Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. For instance, when a company buys back their own shares, they register them in a ‘Treasury Stock’ contra equity account, which reduces total shareholders’ equity.

• To keep a finger on the pulse of your contra accounts, you might also consider dashboards and reporting tools that offer real-time insights into these critical financial metrics.
• The discount on bonds payable is a notable example, reducing the face value of bonds issued below their market value.
• 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.
• And why stop at just theory when you can apply what you’ve learned using premium templates?
• The accumulated depreciation amount shows how much depreciation expense has been charged against an asset.
• Taking the example of CCC again, the company has $50,000 in accounts receivable at year-end of December 31.

Types of Contra Accounts

It plays a vital role in maintaining best procurement software for small and midsize businesses the accuracy and transparency of a company’s financial statements. Contra accounts are used to record adjustments, reversals, or reductions in the value of assets or liabilities. 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.

Example of a Contra Account

The amount in allowance for doubtful accounts is deducted from the accounts receivable account of a company. When the original dollar amount is kept in the original account and a separate account is used for recording the deduction, the resulting financial information becomes more transparent and helpful for stakeholders. For example, a building is acquired for $20,000, that $20,000 is recorded on the general ledger while the depreciation of the building is recorded separately. A contra account is a general ledger account with a balance that is the opposite of another, related account that it is paired with. 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.

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. Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University. Carbon Collective partners with financial and climate experts to ensure the accuracy of our content. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Contra accounts are used to help a company report the original amount of a transaction as well as financial leverage reductions that may have happened. They serve an invaluable function in financial reporting that enhances transparency in accounting books. The balance in the contra account is reduced when the corresponding asset or liability it is paired with is disposed of. Bills payable or notes payable is a liability that is created when a company borrows any specific amount of money. This discount is subtracted from the total amount borrowed to better reflect the discount given by the lender.

It is not classified as a liability since it does not constitute a future obligation. When an entry is recorded in this account the usual rules of entry are reversed adding a debit entry to the contra account. If there is no offset required against a related liability a contra account might have zero balance. Journal entry item related to contra liability account can possibly be identified with the often used word “discount”.