When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense. As mentioned, there can be a contra account for any type of transaction depending on a company’s needs.
Contra Equity Account
Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. For instance, when which account is an example of a contra-expense account? a company buys back their own shares, they register them in a ‘Treasury Stock’ contra equity account, which reduces total shareholders’ equity. If a customer returns a product, the ‘Sales Returns’ contra revenue account lowers the total sales revenue, reflecting the true income.
Is a Contra Account a Debit or Credit?
- The purpose of a contra expense account is to record a reduction in an expense without changing the balance in the main account.
- To properly account for this scenario in their books, the company must record the gross sales figure (which is the total sales revenue) and the value of the discount on early payments.
- The allowance for doubtful accounts is a contra asset account that is used to offset Accounts Receivable on the balance sheet.
- By providing a clear and transparent mechanism to account for adjustments, these accounts enable stakeholders, including investors and creditors, to better understand a company’s financial health.
- Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month.
Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. Expense accounts and the contra expense accounts with which they are paired are typically combined in the income statement in a single line item, so that readers are not aware that a contra account even exists. Contra expense accounts have a natural credit balance, as opposed to the natural debit balance of a typical expense account. Therefore, a contra expense account that contains a debit balance must have a negative ending balance.
Examples of Contra Expense Accounts
A contra expense is an account in the general ledger that is paired with and offsets a specific expense account. The account is typically used when a company initially pays for an expense item, and is then reimbursed by a third party for some or all of this initial outlay. For example, a company pays for medical insurance on behalf of its employees, which it records in an employee benefits expense account.
It is not classified as a liability since it does not represent a future obligation. A liability that is recorded as a debit balance is used to decrease the balance of a liability. 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.
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. Understanding how contra CARES Act expense accounts function is vital for anyone involved in financial management or analysis. They not only help in maintaining transparency but also ensure that financial statements reflect true operational efficiency. A Contra liability account is an account that is used to offset another liability account on the balance sheet. Contra liability accounts are typically used for bonds, notes payable, and other indebtedness.
Contra equity accounts are typically used for a company to buy back its stock or shares. As such, for an asset or expense account that is naturally a debit account, the contra accounts will be in a credit position. For a liability or revenue account that are naturally credit accounts, the contra accounts will be in a debit position. An asset that is recorded as a credit balance is used to decrease the balance of an asset. This account is not classified as an asset since it does not represent a long-term value.