Similarly, accrued liabilities reduce the total amount of current liabilities. Contra accounts are used to help a company report the original amount of a transaction as well as reductions that may have happened. They serve an invaluable function in financial reporting that enhances transparency in accounting books. The sales allowance shows the discounts given to customers when returning the https://www.wave-accounting.net/ product. This is done to entice customers to keep products instead of returning them. The discount on bonds payable amount shows the difference between the amount of cash received when issuing a bond and the value of the bond at maturity. A company creates allowances for doubtful accounts to record the portion of accounts receivable which it believes it will no longer be able to collect.
A contra account is used to record adjustments and transactions that have an opposing impact to report the true value of a firm’s financial statements. Contra accounts will be linked to the main debit account and shown together on a balance sheet. For example, a business ledger might show a $10 sale of a product, but the product was returned under warranty protection because of a failed feature. Examples of contra accounts include Allowance for Doubtful Accounts, Accumulated Depreciation, and Return on Sales.
Why are contra asset accounts important for businesses?
Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts reduce accounts receivable, while accumulated deprecation is used to reduce the value of a fixed asset. Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement. Contra revenue accounts typically offset revenue accounts in a firm’s income statement. Contra liability accounts are less commonly used than contra asset accounts. Contra liability accounts are mainly used by corporations that issue bonds frequently.
Notes PayableNotes Payable is a promissory note that records the borrower’s written promise to the lender for paying up a certain amount, with interest, by a specified date. Discount On Bonds PayableDiscount on bonds payable is the markdown value of a bond’s coupon rate or selling price compared to its market interest rate or fair value. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com.
Why are Contra Accounts Important?
Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. The two common contra liability accounts, discount on bonds payable and discount on notes payable, carry normal debit balances.
- There can be multiple reasons why the company does not expect to receive this owed money.
- The account Allowance for Doubtful Account is credited when the account Bad Debts Expense is debited under the allowance method.
- When a company buys back its own shares from the open market, it records the transaction by debiting the treasury stock account.
- For example, if the balance of accumulated depreciation increases from $20,000 to $50,000, this means that the depreciation expense amounts to $30,000, which will be listed in the income statement.