An expense is a cost that has expired or been taken up by activities that help generate revenue. An expense in accounting is the money spent, or costs incurred, by a business in their effort to generate revenues. Essentially, accounts expenses represent the cost of doing business; they are the sum of all the activities that hopefully generate a profit. 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.
Understanding a Contra Account
Carbon Collective is the first online investment advisor 100% focused on solving climate change. We believe that sustainable investing is not just an important climate solution, but a smart way to invest. The purpose of the Owner’s Withdrawal account is to track the amounts taken out of the business without impacting the balance of the original equity account. A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. Taking the example of CCC again, the company has $50,000 in accounts receivable at year-end of December 31. CCC estimates that 5% of accounts receivable will most likely be unrecoverable.
Expense Contra Account
By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes. For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately. Inscrutable Corporation offers long-term disability insurance to its employees under an arrangement contra expense account in which it pays for the insurance, and then participating employees reimburse it for half of this cost. In the first month of the arrangement, the company pays the insurer $10,000, which Inscrutable records in a long-term disability insurance expense account. It then records $5,000 of contra expense against this account, which is derived from deductions taken from employee pay. It is important to realize that unearned revenue is not a contra revenues account.
Example #2: Asset Contra Account
Contra assets give investors a better picture of how you use your assets over time. The reason you show a contra asset on a balance sheet is so you can see the overall net balance of a particular asset and to give investors a more accurate look into your company’s financial activity. A contra account provides missing context by pairing it with a related account.
Types of Contra Accounts – Explanation
Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance. Assume that a company uses a contra expense account to record the amounts that employees paid toward the company’s health insurance costs. For instance, the company might debit its expense account 4210 Employee Health Insurance Expense when recording the insurance company’s invoice of $10,000. If the company withholds $2,000 from its employees’ wages to pay part of the cost of the insurance, the company will credit its contra expense account 4211 Employee Withholdings for Health Ins. In the financial statements the purchases account would be offset against the contra expense accounts to show the net purchases. For liability and revenue accounts, credit transactions will increase and debit transactions will decrease the account balances.
- This will ensure the net value of accounts receivable at year-end is not overstated.
- Expenses are income statement accounts that are debited to an account, and the corresponding credit is booked to a contra asset or liability account.
- Similarly, accumulated depreciation accounts reduce the value of the fixed assets you report on your financial statements.
- Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements.
- This indicates that out of $100,000 sales, your customers return goods valued at $500.
The contra asset account of your equipment account is the accumulated depreciation of equipment. When the balance in the accumulated depreciation is $10,000 and your equipment account has a debit balance of $50,000, then the book value of your equipment is $40,000. The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable. It also shows the carrying (net) amount of $19,000, which you report to your firm’s balance sheet. Bills payable or notes payable is a liability that is created when a company borrows any specific amount of money. This discount is subtracted from the total amount borrowed to better reflect the discount given by the lender.
- The credit balance in the liability account Bonds Payable minus the debit balances in the contra-liability accounts Discount on Bonds Payable and Bond Issue Costs results in the carrying value or book value of the bonds.
- Extraordinary expenses are costs incurred for large one-time events or transactions outside the firm’s regular business activity.
- The net effect of the two accounts is a reduced total benefits expense for the company.
- A contra expense account is a general ledger expense account that will intentionally have a credit balance (instead of the debit balance that is typical for an expense account).
- The credit balance in Notes Payable minus the debit balances in Discount on Notes Payable is the carrying value or book value of the notes payable.
- If you’re still using manual accounting systems, you’ll need to do a bit more work by recording your accumulated depreciation expense in your general ledger while also reporting it on your balance sheet as a contra asset account.
- Contra expense accounts are rarely used, because organizations find it to be easier to record third-party payments directly against an expense account.
Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. Discount on Bonds Payable is a contra liability account with a debit balance that reduces the normal credit balance of its parent Bonds Payable liability account in order to present the net value of payables on a company’s balance sheet. Discount on Notes Receivable is a contra asset account with a credit balance that reduces the normal debit balance of its parent Notes Receivable asset account in order to present the net value of receivables on a company’s balance sheet. Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement. The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation.
- Sometimes, we have an ancillary balance whose normal balance is the same as that of the parent account.
- For example, we need to keep the face value of a bonds payable and the premium amount in separate ledger accounts even though both have credit balances.
- This type of account could be called the allowance for doubtful accounts or a bad debt reserve.
- The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment.
- Likewise, when you pay a bill, your cash account is reduced (credited) because you’re lowering the balance.
- If you debit the contra account, ensure that you offset the related account with a credit balance.