The annual amortization of the cost of an asset is referred to as depreciation expense. The corresponding effect is charged to accumulated depreciation accounts. Accumulated depreciation accounts accumulate the depreciation expense charged on the asset. When bad debts are incurred, the allowance for doubtful debts would decrease and the accounts receivable would be reduced by that amount. If your expenses occur faster than agreed upon prepayments, you could end up with a situation where a prepaid expense account could start carrying a credit balance. This could happen if, for example, you’re having worker’s comp insurance premiums go up after you’ve already made payment due to a workplace accident.

Accounts of this type may have internet access to their accounts, they may charge purchases to their account, and in some cases, the account may carry a financial balance. Occasionally, the university makes an agreement with an external entity to share the expenses of a particular activity. It might be more efficient or convenient for the department to initially pay all the expenses; however, the cost of that activity on the university’s books should only reflect its share of the expenses. In these situations, the funds received from the other party should be recorded as a reimbursement of expenses and not as revenue.

How to Use Contra Asset Accounts

For Revenue, Liability, and Equity accounts, a “positive” balance is a credit balance. Firms that sell to other businesses designate their major repeat customers as accounts.

Contra LiabilityFinancing fees in M&A are an example of a contra liability, as the fees are amortized over the debt’s maturity – which in turn reduces the tax burden until the end of the term. Suppose a company has recorded $100,000 in accounts receivable (A/R) and $10,000 in the allowance for doubtful accounts (i.e. 10% of A/R is estimated as uncollectible).

Allowance for Doubtful Accounts

Transactions enter the journal when they occur, as the 2nd step in the accounting cycle. As a 4th step, they check entries with a trial balance and correct them if necessary. Note, however, however, that public companies must also complete the cycle by having 3rd-Party auditors review them and issue audit opinions, and then filing them with securities authorities. If instead, the firm finances the purchase with a bank loan, the offsetting transaction could be a credit to a liability account. Increasing “Account 171, Bank loans payable” by $100,000 would restore the Balance sheet balance. In the double-entry system, however, whether a debit or a credit increases or decreases the account balance depends on the kind of account in view. The bank statement use is technically correct, but only because the checking account owner is—to the bank—a liability account.

The net loss or gain in this account transfers to Retained Earnings, which is a permanent account. A contra liability account is a liability account that is debited in order to offset a credit to another liability account.

What is Contra Account?

It offsets the balance of the related account, which means when the corresponding account is positive, a contra account will be negative. Debit BalanceIn a General Ledger, when the total credit entries are less than the total number of debit entries, it refers to a debit balance.

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List of Contra Accounts

Companies that issue bonds are likely to use contra liability accounts. Debits and credits are traditionally distinguished by writing the transfer amounts in separate columns of an account book. Alternately, they can be listed in What is a Contra Expense Account? one column, indicating debits with the suffix «Dr» or writing them plain, and indicating credits with the suffix «Cr» or a minus sign. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation.

The purpose of this version is to show the general approach to account numbering and naming. A complete example—even for a small company—would no doubt list many more accounts.

Definition and Examples of Contra Assets

A bank customer with a bank account, for instance, has a right to deposit and withdraw funds, write checks against that account, and receive interest payments for funds on deposit. The bank on the other https://simple-accounting.org/ hand, may use the depositor’s funds for its investments and charge the account holder maintenance fees. The Exhibit 5 Chart of accounts, below, is just an extract from real a chart of accounts.

If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts. At the end of the year, expense accounts need to be closed, or zeroed out. Expense accounts need to be closed because they are temporary, meaning that they pertain only to a given accounting period and won’t carry over into the next one. When expense accounts are closed, they close to another temporary account, known as Income Summary. So, the expense accounts must be credited, and the Income Summary will be debited.

Suppose, for example, that a firm acquires assets valued at $100,000. This impact could occur in “Account 163, Factory manufacturing equipment” from the Chart of accounts below. A delivery van is purchased by a business to use in delivering product and picking up materials.

Accumulated Depreciation is a contra asset that pairs with Fixed Assets. Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset. A Fixed Asset is a Long-term Asset used by a company to create revenue.

• An expense account which is expected to have a credit balance instead of the typical debit balance.
• In business, firms earn revenues from the sale of goods and services or investments.
• It is not classified as a liability since it does not represent a future obligation.
• The above examples show contra asset accounts, but there are also contra liability accounts that operate in the same way.
• These assets are expected to provide future economic benefits for many accounting periods.
• Instead, it is reported at its full amount with an allowance for bad debts listed below it.

This frequently happens to manufacturing companies that sell products with an expiration date since any inventory remaining in stock past the expiration date quickly becomes obsolete. Robert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive. He is a professor of economics and has raised more than $4.5 billion in investment capital. Nora O’Malley covers small business finance and entrepreneurship topics for The Balance. Along with her writing work, Nora is an entrepreneur and consultant who opened an all-tap wine bar in New York’s East Village dubbed Lois and owns a sophisticated snack food business Aida. For her businesses, Nora is responsible for finances, marketing, operations, and fundraising. Along with The Balance, her writing has appeared in Thrillist, Insidehook and Vinepair.

For instance, a contra account that relates to an accounts receivable is called a contra asset account. Now, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. 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. So, essentially, all these situations are mistakes that people could make.