Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount. For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. Dividends are money paid to shareholders of a company for their investment. Dividends are not recorded as an expense account, but instead are a contra capital account. Dividends are not a source of capital, but instead are a use of capital. Dividends is a debit account, capital accounts are normally credit accounts.

Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete. Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods. In this scenario, a write-down is recorded to the reserve for obsolete inventory. Allowance for doubtful accounts is a contra asset account used to create an allowance for customers who are not expected to pay the money owed for purchased goods or services. The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables.

How to Record Abandonment on Cash Flow Statements

Sales Discounts –Sales discounts are offered on sales of goods to attract buyers. Contains either an allowance for reductions in the price of a product that has minor defects, or the actual amount of the allowance attributable to specific sales. Net receivables are the money owed to a company by its customers minus the money owed that will likely never be paid, often expressed as a percentage.

• Contra accounts are commonly found on general ledgers where all of a business’s accounts and transactions are organized on a master list.
• Some accountants will keep a reference handy to know if the debit increases or the credit increases an account.
• Any products that are sold at a discount or returns are deducted from gross revenue to produce net revenue as the top line on the income statement.
• For freelancers and SMEs in the UK & Ireland, Debitoor adheres to all UK & Irish invoicing and accounting requirements and is approved by UK & Irish accountants.

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. Balance sheet, users of financial statements can learn more about the assets of a company. In order to balance the journal entry, a debit will be made to the bad debt expense for $4,000. 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.

Types of contra accounts

For example, Accumulated Depreciation is a contra asset account, because its credit balance is contra to the debit balance for an asset account. This is an owner’s equity account and as such you would expect a credit balance. Other examples include the allowance for doubtful accounts, discount on bonds payable, sales returns and allowances, and sales discounts. For example net sales is gross sales minus the sales returns, the sales allowances, and the sales discounts.

When the account receivable is written off, it is added to bad debt expense on the income statement and placed in the contra account. If a company has a high or fast-growing allowance as a percentage of accounts receivable, keep a close eye on it. It could be growing with bad accounts, and cash flow will be affected.

What Are the Different Types of Contra Accounts?

This reduces the amount of the carrying value of a company’s fixed asset to account for the wear and tear over the asset’s useful life. Fixed assets are often listed on the balance sheet as property, plant and equipment. The accumulated depreciation account appears on the balance sheet as a credit and is a reduction from the total amount listed for fixed assets. Some companies choose not contra meaning in accounting to include accumulated depreciation on the balance sheet and simply list the net amount of property, plant and equipment. Examples of contra accounts include Allowance for Doubtful Accounts, Accumulated Depreciation, and Return on Sales. The Johnson family’s purchase of furniture illustrated the effect on the financial statements for two kinds of contra accounts, revenue, and asset.