There can be hidden value in stocks that have a lot of fully depreciated buildings. Companies like to depreciate assets as quickly as possible to get the tax savings, so the balance sheet may not state the true value of fixed assets. If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative. On the other hand, if you’re looking at a high-flying growth stock that reports new revenue growth records each quarter but has a massive allowance for doubtful accounts, there may be problems ahead. Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.

Taking a closer look at contra asset accounts

Examples of a contra revenue accounts include sales returns, sales discounts, and sales allowances. You debit the contra revenue accounts and credit the corresponding revenue accounts. For example, when you debit the balance in sales returns account, make sure that you offset the sales revenue account with a credit balance.

Contra Revenue Sales Discount Illustration

Examples of contra assets include Accumulated Depreciation and Allowance for Doubtful Accounts. Unlike an asset which has a normal debit balance, a contra asset has a normal credit balance because it works opposite of the main account. As mentioned, contra asset accounts usually have a negative value which is the same as a credit balance. That is to completely or partially offset the balance of their related asset accounts. Asset accounts usually have a positive value which is the same as a debit balance. However, some asset accounts need a negative counterpart to reduce the balance of that account.

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• Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers.
• Bills payable or notes payable is a liability that is created when a company borrows any specific amount of money.
• Contra revenue accounts typically offset revenue accounts in a firm’s income statement.
• Contra Equity Account – A contra equity account has a debit balance and decreases a standard equity account.
• When the amount is material, the line item is typically presented separately on the balance sheet, below the liability account with which it is paired.
• All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

The accumulated depreciation amount shows how much depreciation expense has been charged against an asset. Contra accounts are more commonly paired with asset accounts, such as accounts receivable or inventory, to reduce the carrying values of those assets. A liability that is recorded as a debit balance is used to decrease the balance of a liability. It is not classified as a liability since it does not represent a future obligation. Including contra accounts on a balance sheet is important as it allows for a more transparent view of a company’s financial position.

• 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.
• It’s crucial to have an accounting and bookkeeping team (whether outsourced or internal bookkeeping) to help ensure accuracy for your contra account.
• Contra accounts act like regular accounts on the balance sheet but have a unique purpose.
• However, these vehicles have experienced significant wear and tear in the intervening years.
• To account for this, you would debit $50,000 in Accounts Receivable and credit $50,000 in Sales.

Contra liability account example

• While transactions may be recorded in one or more arrangements, the typical balance is a debit, contrasting with the usual credit balance in a standard sales account.
• The two most common contra accounts are the allowance for doubtful accounts/bad debt reserve, which is subtracted from accounts receivable, and accumulated depreciation, which is subtracted from fixed assets.
• A separate account is needed whenever the nature of transactions changes.
• This discount is subtracted from the total amount borrowed to better reflect the discount given by the lender.
• If every single buyer had taken advantage of the early payment discount, the company would have provided roughly $10 thousand in discounts during that same timeframe.

They are used in case some customers won’t be able to pay the money they owe to the business. If a company sells a bond at a discount, the difference between the cash received and the value of the bond it sold will be listed as “discount on bonds payable,” which is a contra liability account, the counterpart of bonds payable. Note that in accounting, the term “book value” is also used interchangeably with net value.

By viewing these accounts — the parent and contra — in tandem, business owners can gain broader insights, preserve the historical figures stored in the parent account, and make accommodations for any relevant changes. At Zeni, we keep it simple for you to record all of your contra revenue in one dedicated place and view the changes to your accounts over time AND in real-time. Our AI-powered tool gives you daily access to your company’s finances while our expert finance team double-checks contra revenue account the numbers every step of the way. A doubtful debts contra account allows for future write-offs of accounts receivable. Although you have not officially written off these debts yet, you show them to be a negative balance because you don’t believe the customer will pay you. 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.

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This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000. The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount. This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms. Most accounts receivable would just be the time between purchase and credit card settlement. In the above example, the debit to the contra liability account of $100 lets the company recognize that the bond was sold at a discount.

• If you debit the contra account, ensure that you offset the related account with a credit balance.
• Instead, it is reported at its full amount with an allowance for bad debts listed below it.
• This depreciation is saved in a contra asset account called accumulated depreciation.
• Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares.
• This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders.
• For example, it is not very useful to show the PPE cost account and the related accumulated depreciation account separately on the balance sheet.

A key example of contra liabilities includes discounts on notes or bonds payable. 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 revenue accounts reduce revenue accounts and have a debit balance.

The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. Allowance for doubtful accounts is netted from the accounts receivable balance. The company predicts which accounts receivable won’t be paid by customers and writes those off. When the account receivable is written off, it is added to bad debt expense on the income statement and placed in the contra account. If a company has a high or fast-growing allowance as a percentage of accounts receivable, keep a close eye on it.