Definition
A contra account is a balance sheet account that is used to offset a related asset, liability, or equity account. Contra accounts are used to ensure the proper valuation of these items is reflected on the balance sheet.
Explanation
All balance sheet accounts can have corresponding contra accounts. Generally, such accounts are subdivided into three groups:
Contra Asset: an account which has a credit balance that is used to offset (deduct from) an asset account.
Contra Liability: an account which has a debit balance that is used to offset (deduct from) a liability account.
Contra Equity: an account which has a debit balance that is used to offset (deduct from) an equity account.
Allowance for Doubtful Accounts, Accumulated Depreciation, and Valuation Allowance for Marketable Securities are contra asset accounts; while Discounts on Bonds Payable is an example of a contra liability account. Treasury stock and drawing accounts are examples of contra equity accounts.
Example
Company A's balance sheet indicates accounts receivable of $4,292,300 and an allowance for doubtful accounts of $425,300. The net receivables of Company A, as shown on the balance sheet, would be:
Accounts Receivable | $4,292,300 |
Less: Allowance for Doubtful Accounts | $425,300 |
Net Accounts Receivable | $3,867,000 |
Related Terms
Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.
Moneyzine EditorJanuary 8th, 2024
The accounting term used to describe an economic resource, which is owned by the corporation and expected to provide future benefits to its operation, is asset. Appearing on the balance sheet, assets are typically broken down into two categories:Moneyzine EditorJanuary 5th, 2024.png)
The financial accounting term liability is used to describe the debt of a corporation that results from a transaction involving the transfer of an asset or the provision of a service. Liabilities are reported on a company's balance sheet.Moneyzine EditorJanuary 23rd, 2024- The financial accounting term owner's equity is used to describe the resources that are owned by the common and preferred stock shareholders of a company. Owner's equity is reported on a company's balance sheet.Moneyzine EditorSeptember 20th, 2023
The term drawing account is used to describe an account that records money and assets withdrawn from a company by its owners. Drawing accounts are typically associated with unincorporated businesses such as partnerships and sole proprietorships.Moneyzine EditorJanuary 16th, 2024
The financial accounting term discounts on notes payable is used to describe a contra liability account that holds future interest charges that are included on the face value of a promissory note.Moneyzine EditorJanuary 16th, 2024
The financial accounting term discounts on notes receivable is used to describe a contra asset account that holds unearned interest that was included in notes receivable.Moneyzine EditorJanuary 16th, 2024
The financial accounting term bad debts expense refers to the portion of revenue a company does not expect to collect from customers. The Matching Principle dictates bad debts are recorded as an expense in the same accounting period in which the sale occurred.Moneyzine EditorJanuary 8th, 2024
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