This article will give you the definition of contra in accounting, talk about different contra accounts, and give examples. From studying the basics of debit and credit, balance sheet accounts have a healthy balance. These accounts can be listed based on the respective asset, liability, or equity account to reduce their original balance. It is linked to specific accounts and is reported as reductions from these accounts. An expense account which is expected to have a credit balance instead of the typical debitbalance. The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet.
contra expense account definition
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Impact on Financial Statements
Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts. In other words, contra accounts are used to reduce normal accounts on the balance sheet. Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. Accumulated depreciation is the total of all depreciation that contra expense meaning has been charged to existing fixed assets such as equipment and buildings. 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.
Example of Contra Expense Account
These are used for recording certain transactions that involve money being moved. The article discusses contra records, their aim, and some common instances as well as how they are arranged within the double-entry system. As per Class 11 accounting, contra-entry transactions record both debit and credit transactions within the same ledger accounts. A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger. A bank-to-bank transfer involves journal entries that debit the bank account from which funds are transferred and credit the receiving bank account. For cash withdrawn https://www.bookstime.com/ from a bank for office use, the journal entry includes debiting the relevant office expense account and crediting the bank account.
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- A contra expense is an account in the general ledger that is paired with and offsets a specific expense account.
- For example, if a company returns defective goods to a supplier, the value of the returned goods is credited to a purchase returns and allowances account, a type of contra expense account.
- This accuracy is crucial for stakeholders who rely on these metrics to gauge a company’s financial health and make investment decisions.
Types of Contra Assets
- A debit will be made to the bad debt expense for $4,000 to balance the journal entry.
- In accounting, Contra Entries emerge as the guiding stars that navigate businesses towards financial accuracy and operational clarity.
- Examples of revenue contra accounts are Sales Discounts, Returns and Allowances.
- It is an event that is recorded twice for it reflects how funds circulate inside an organization precisely.
For example, if a company returns defective goods to a supplier, the value of the returned goods is credited to a purchase returns and allowances account, a type of contra expense account. This reduces the total cost of goods purchased, thereby adjusting the expense to reflect only the net cost. They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting. For instance, it is common to keep the purchase price of a piece of equipment as a historical cost in the debit asset account when it comes to fixed assets. 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.