Contra Account Definition + Journal Entry Examples

Revenues are deferred to a balance sheet liability account until they are earned in a later period. When the revenues are earned they will be moved from the balance sheet account to revenues on the income statement. The balance sheet reports the assets, liabilities, and owner’s (stockholders’) equity at a specific point in time, such as December 31. The balance sheet is also referred to as the Statement of Financial Position. Note that the ending balance in the asset Prepaid Insurance is now $600—the correct amount of insurance that has been paid in advance. The income statement account Insurance Expense has been increased by the $900 adjusting entry.

Double Entry Bookkeeping

These are all examples of contra asset accounts, which are the prevalent type of contra accounts. So for example there are contra expense accounts such as purchase returns, contra revenue accounts such as sales returns and contra asset accounts such as accumulated depreciation. A contra asset account reduces the reported value of an asset on the balance sheet, such as Accumulated Depreciation reducing the value of fixed assets. A contra liability account reduces the reported value of a liability, such as Discount on Bonds Payable lowering the carrying amount of bonds outstanding.

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Usually, companies add to the accumulated depreciation account after every accounting period. Although contra-asset accounts have credit balances, they do not appear in liabilities or equity. In essence, contra-asset accounts have a negative balance while other asset accounts have a positive balance. Both of these accounts offset each other to represent a net https://dev-zikueducationbangla.pantheonsite.io/how-to-calculate-product-cost-per-unit/ balance on a company’s balance sheet.

Corporate and Business Entity Forms

This method ensures that the company’s financial records show both the original cost of the equipment and the depreciation that has occurred over time. Instead of reducing the contra-asset account asset’s value directly, the company records depreciation in an Accumulated Depreciation contra account. Each of these contra accounts serves to provide more detailed information about the transaction history of the related main account.

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own.

• This account helps all the stakeholders understand the financial numbers accurately.
• In a typical accounting system, transactions are recorded in specific accounts, such as assets, liabilities, and equity.
• They play a critical role in helping businesses and analysts understand the true financial position of a company.
• Concurrently, an allowance for doubtful accounts is established or adjusted, which is a contra-asset account that offsets the accounts receivable balance on the balance sheet.

Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc. Most asset accounts will carry a debit balance, but contra asset accounts will show an opposite balance—usually expressed as a credit. Contra asset accounts are linked to regular asset accounts and serve to present a more accurate and realistic view of asset valuation as well as reduce the value of the asset account.

Common stock

By doing so, you can more clearly see the total amount of the related asset account, which would otherwise have been obscured by the offsetting amount of the reserve. There is almost always a story behind data; a clarification or historical insight that changes the meaning behind raw figures. How to Run Payroll for Restaurants In a report, layering on that additional context can be easy, but in a general ledger, you have few options for conveying nuance and subtlety. Namely, within a ledger, each account is intended to contain transactions and balances of a similar type only. But sometimes, dissimilar transactions are important to consider together within a ledger.