Contra Account Definition + Journal Entry Examples

A transaction is made under the sales return account when a customer returns a product to the company for a refund. Sales allowance represents discounts given to customers to entice them to keep products instead https://menafn.com/1106041793/How-to-effectively-manage-cash-flow-in-the-construction-business of returning them, such as with slightly defective items. The sales discount account represents the discount amount a company gives to customers as an incentive to purchase its products or services.

A regular asset account typically carries a debit balance, so a contra asset account carries a credit balance. Two common contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts represents the percentage of accounts receivable a company believes it cannot collect.

Overview of Contra Asset Account

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Contra LiabilityFinancing fees in M&A are an example of a contra liability, as the fees are amortized over the debt’s maturity – which in turn reduces the tax burden until the end of the term. Whether reported as separate lines on the financial report or as a cumulative value, the net amount of the pair of accounts is called the “net book value” of the individual asset. Suppose a clothing business has sold $50,000 of inventory on credit. In other words, accumulated depreciation will be $10,000 each year until the car depreciates to $0 twenty years later.

• Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value.
• A debit balance is a net amount often calculated as debit minus credit in the General Ledger after recording every transaction.
• The account offsets the balance in the respective asset account that it is paired with on the balance sheet.
• Designed for freelancers and small business owners, Debitoor invoicing software makes it quick and easy to issue professional invoices and manage your business finances.

But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. 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. Designed for freelancers and small business construction bookkeeping owners, Debitoor invoicing software makes it quick and easy to issue professional invoices and manage your business finances. Intangible assets are non-monetary assets that cannot be seen, touched, or physically measured. Need a robust accounting system; else, operational difficulties may arise.

Example of a Contra Account

Contra LiabilityA contra liability is a liability account that carries a debit balance as opposed to a credit balance. While accumulated depreciation is the most common contra asset account, the following also may apply, depending on the company. A contra asset is a negative asset account that offsets the asset account with which it is paired. The purpose of a contra asset account is to store a reserve that reduces the balance in the paired account. By stating this information separately in a contra asset account, a user of financial information can see the extent to which a paired asset should be reduced. A less common example of a contra asset account is Discount on Notes Receivable.