What is a contra-liability account?

Contra liability accounts have a debit balance, which is the opposite of the typical credit balance found in liability accounts. The purpose of a contra liability account is to reduce the total liability shown on the balance sheet by reflecting specific adjustments, allowances, or discounts related to the liability. A debit will be made to the bad debt expense for $4,000 to balance the journal entry. 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. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns.

Given that liabilities have a credit balance, ensure that all your contra liabilities accounts have debit balances. Discount on notes payable and discount on bonds are examples of contra liability accounts. Examples of a contra revenue accounts include sales returns, how to calculate sales tax sales discounts, and sales allowances. You debit the contra revenue accounts and credit the corresponding revenue accounts. For example, when you debit the balance in sales returns account, make sure that you offset the sales revenue account with a credit balance.

List of Contra Accounts

In terms of this contract, your obligation will then be the delivery of the car. Most often in such situations the amount of loan payable is reduced directly from loan payable account & a profit is shown on the Income statement of the business. The first contra liability listed is an original issue discount (OID), a feature of debt financing wherein the issuance price is less than the redemption price. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.

Contra-liability accounts are a type of account used in double-entry bookkeeping to offset the normal balance of a liability account. A liability account typically has a credit balance, which means that an increase in the account is recorded as a credit and a decrease is recorded as a debit. A contra-liability account, on the other hand, has a debit balance, which means that an increase in the account is recorded as a debit and a decrease is recorded as a credit.

How are Contra Accounts Used and Reported?

Contra liabilities are lower liability accounts and have a debit balance. For example, if a company has a $1,000 credit balance in its Accounts Payable account, it may create a contra liability account called Accounts Payable Offset. This account would have a $1,000 credit balance, offsetting the Accounts Payable account’s balance. Contra-liability accounts differ from other types of accounts in that they have a debit balance instead of a credit balance. Most other accounts, such as asset, revenue, and expense accounts, have a credit balance, which means that an increase in the account is recorded as a credit and a decrease is recorded as a debit. Contra-liability accounts, on the other hand, have a debit balance, which means that an increase in the account is recorded as a debit and a decrease is recorded as a credit.

Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset. Each year of an asset’s life, another year of Depreciation Expense is recorded. The offset to the Depreciation Expense account is Accumulated Depreciation. Let’s consider a fictional example of a company called “Green Energy Corp.” to illustrate the use of a contra liability account in financial accounting. Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement. The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline.

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For example, an asset was purchased by a company for $100,000 – that is, the historical cost of the asset was $100,000 – and its contra asset counterpart has a balance of $30,000. Although they all aim at reducing the balance of some type of account, it is useful to have https://online-accounting.net/ some general foundational knowledge of the different types of accounts. If the balance in your allowance for doubtful accounts has a credit of $1,000 and your accounts receivable has $20,000 in normal debit balance, then the net value of the receivables is $19,000.

Once the performance obligation has been carried out (i.e. machines have been delivered to Goop Co.), the amount is going to reflect in the Income Statement as a Revenue. In the scenario mentioned above, it can be seen that Brings Co. has taken an advance amount equivalent to $100,000 from Goop Co. Brings Co. plans on beginning work on the contract once the payment has been finalized.

The Role of Contra-Liability Accounts in Double-Entry Bookkeeping

Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt. Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value. For example, GAAP accounting (or generally accepted accounting principles) requires fixed assets to be reported at cost on the balance sheet, but, over time, that value depreciates as the assets are used. The balance sheet will show a gross fixed assets value, a contra account value for accumulated depreciation, and a net value.

• You may use accounting software packages, such as QuickBooks Online to set up contra accounts.
• That is done by crediting accounts receivable by $100 and debiting the contra revenue account sales returns and allowances for $100.
• If the bond is sold at a discount, the company will record the cash received from the bond sale as “cash”, and will offset the discount in the contra liability account.
• So, what’s the difference between contract assets and contract liability.

Before that, it will be treated as a contract liability in the financial statements. Contra Equity Account – A contra equity account has a debit balance and decreases a standard equity account. Treasure stock is a good example as it carries a debit balance and decreases the overall stockholders’ equity. In conclusion, contra-liability accounts can be a useful financial tool when used correctly. They are generally used to offset the value of an asset or liability on a company’s balance sheet. Understanding how contra-liability accounts work and how they can affect a company’s financial reporting is important.

By using contra liability accounts, financial statement users can gain a more accurate and detailed understanding of the company’s liability position, allowing for better financial analysis and decision-making. When an entry is recorded in this account the usual rules of entry are reversed adding a debit entry to the contra account. If there is no offset required against a related liability a contra account might have zero balance. Journal entry item related to contra liability account can possibly be identified with the often used word “discount”.

• Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value.
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• The balance sheet will show a gross fixed assets value, a contra account value for accumulated depreciation, and a net value.
• Once the performance obligation has been carried out (i.e. machines have been delivered to Goop Co.), the amount is going to reflect in the Income Statement as a Revenue.
• On the balance sheet, the net liability for the bonds payable will be reported as $980,000 ($1,000,000 – $20,000), reflecting the impact of the discount on bonds payable.

When netted together, the two accounts yield the carrying value of a bond. A contra-liability account is a liability account in which the balance is expected to be a debit balance. Since a debit balance in a liability account is contrary to the normal credit balance, the account is referred to as a contra-liability account.