Contra accounts are a significant part of a company’s financial statements. These accounts can significantly reduce balances on the balance sheet. This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000. A customer returned $100 worth of items, claiming them to be defective. A bills payable account is another contra liability account that is created to record any discount received by the other party. Bills payable is an agreement written on behalf of the seller stating that a company will make payment on a future date.

• They are used in case some customers won’t be able to pay the money they owe to the business.
• From the bank’s point of view, your credit card account is the bank’s asset.
• Contra accounts are usually linked to specific accounts on thebalance sheetand are reported as subtractions from these accounts.
• The Profit and Loss Statement is an expansion of the Retained Earnings Account.

In other words, contra accounts are used to reduce normal accounts on the balance sheet. Accumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset’s purchase price and its carrying value on the balance sheet.

What is the importance of Contra Asset Accounts?

All Income and expense accounts are summarized in the Equity Section in one line on the balance sheet called Retained Earnings. This account, in general, reflects the cumulative profit or loss of the company. Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers. The amount is not reported, and the net sales amount is reported on the income statement. For instance, if a company has $100,000 worth of inventory, but expects to sell only $90,000 of it due to damage or obsolescence, the contra account for inventory allowances would be $10,000. This reduces the value of the inventory to its net realizable value of $90,000.

Contra accounts are additional accounts that are maintained to bring more accuracy to the financial statement of a company. They are used to keep track of the historical cost https://azbigmedia.com/real-estate/how-do-real-estate-accounting-services-improve-clients-finances/ of assets instead of reducing the value of an asset. Another example of a contra account is a discount allowed account, which is the contra account to revenue account.

Contra revenue account

In case the CA account is not listed in the balance sheet, it must be listed in the footnotes of the financial statement for the users to be informed. Both the asset and the corresponding CA accounts must be stated clearly in the balance sheet. Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset’s net value or book value. Although they all aim at reducing the balance of some type of account, it is useful to have some general foundational knowledge of the different types of accounts. The definition can be expanded to include contra accounts in general.