Which of the following is a contra equity account

A contra account is an account with a balance opposite the normal accounts in its category. Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts. In other words, contra accounts are used to reduce normal accounts on the balance sheet.

Types of Contra Accounts – Explanation

There are a few different types of contra accounts in the chart of accounts. Each one is tied to their respective asset, liability, or equity account to reduce their carrying balance on the balance sheet. Here’s a list of the main types of contra accounts:

Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance. An example of this is accumulated depreciation. This account decreases the fixed asset carrying balance.

Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. An example of this is a discount on bonds payable.

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.

Example

How are Contra Accounts Used and Reported?

Take the equipment account for example. Equipment is a long-term asset account that has a debit balance. Equipment is depreciated over its useful. This depreciation is saved in a contra asset account called accumulated depreciation. The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment. The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation.

By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount. Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset.

The same is true for other asset accounts like accounts receivable. Accounts receivable is rarely reported on the balance sheet at its net amount. Instead, it is reported at its full amount with an allowance for bad debts listed below it. This shows investors how much receivables are still good. Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off.

Contra Account is an opposite entry passed to offset the balances of related original accounts in the ledger and helps the organization retrieve the original amount and the amount of decrease in the value, thereby presenting the net balances of the account.

• It is a general ledger account to have its balance be the opposite of the original balance for that account. It is linked to specific accounts and is reported as reductions from these accounts.
• The transactions made in this account are reported on a company’s financial statements directly under the related account.
• The usual pattern for a Contra Account is Gross Amount – (Amount in the Contra Ac) = Net Amount.

Table of contents

• What is a Contra Account?
  • List of Contra Accounts with Examples
    • #1 – Contra Asset
    • #2 – Contra Liability
    • #3 – Contra Equity
    • #4 – Contra Revenue
  • Debit or Credit
  • Why are Contra Accounts Important?
  • Recommended Articles

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Source: Contra Account (wallstreetmojo.com)

List of Contra Accounts with Examples

These accounts can be listed based on the respective asset, liability, or equity account to reduce their original balance.

Below is the list you should be aware of –

#1 – Contra Asset

An asset that is recorded as a credit balance is used to decrease the balance of an asset. The balance of a contra asset accountContra Asset AccountA contra asset account is an asset account with a credit balance related to one of the assets with a debit balance. When we add the balances of these two assets, we will get the net book value or carrying value of the assets having a debit balance.read more is a credit balance. This account decreases the value of a hard asset. This account is not classified as an asset since it does not represent a long-term value. It is not classified as a liability since it does not constitute a future obligation.

These contra accounts examples include

• Allowance for doubtful accounts – Allowance for doubtful accountsAllowance For Doubtful AccountsAllowance for doubtful accounts primarily means creating an allowance for the estimated part that may be uncollectible and may become bad debt and is shown as a contra asset account that reduces the gross receivables on the balance sheet to reflect the net amount expected to be paid.read more is the percentage of bad debts estimated from the Accounts receivable account. This account offsets a company’s accounts receivable accountAccounts Receivable AccountAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. read more.

• Accumulated Depreciation – DepreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more is the reduction in the value of an asset. Accumulated depreciation represents the cumulative amount of depreciation incurred by an asset. This account offsets a company’s real property assets, including machinery, furniture, buildings, etc. Accumulated depreciationAccumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset's purchase price and its carrying value on the balance sheet.read more reduces the value of an asset.

#2 – Contra Liability

A liability recorded as a debit balance is used to decrease the balance of a liability. The balance of a contra liability account is a debit balance. This account decreases the value of the liability. Contra Liability a/c is not used as frequently as contra asset accounts. It is not classified as a liability since it does not represent a future obligation.

The examples of contra liability accounts include:

• Discount on bonds payable – This is the difference between the amount of cash a company receives when issuing bondsBondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.read more and the value of the bond at maturity. A Discount on bonds payable reduces the value of a bondDiscount 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. Such bonds trade at a lower price than their face value.read more.

• Discount on notes payableNotes 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. read more – The discount offered on the liability created when a company borrows a specific amount of money and repays it early. Discount on notes payable reduces the total amount of the note to reflect the discount offered by the lender.

#3 – Contra Equity

Equity recorded as a debit balance is used to decrease the balance of a standard equity account. It is a reduction from equity because it represents the amount paid by a corporation to buy back its stockBuy Back Its StockShare buyback refers to the repurchase of the company’s own outstanding shares from the open market using the accumulated funds of the company to decrease the outstanding shares in the company’s balance sheet. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company.read more. The contra equity account reduces the total number of outstanding sharesOutstanding SharesOutstanding shares are the stocks available with the company's shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner's equity in the liability side of the company's balance sheet.read more. The treasury stock accountTreasury Stock AccountTreasury Stock is a stock repurchased by the issuance Company from its current shareholders that remains non-retired. Moreover, it is not considered while calculating the Company’s Earnings Per Share or dividends. read more is debited when a company buys back its shares from the open market.

#4 – Contra Revenue

The contra revenue account is a reduction from gross revenue, which results in net revenue. These transactions are reported in one or more contra revenue accounts, which usually have a debit balance and reduce the total amount of the company’s net revenue.

 Examples of contra revenue accountRevenue AccountRevenue accounts are those that report the business's income and thus have credit balances. Revenue from sales, revenue from rental income, revenue from interest income, are it's common examples.read more include:

• Sales Returns- Sales returns is a Contra Ac of the sales account. This transaction records when a customer returns the paid goods, and a refund must be given.
• Sales Allowances- Sales allowances are also a part of the sales account. Sales allowance reduces the selling price when a customer agrees to accept a defective unit instead of returning it to the seller. 
• Sales Discounts – Sales discounts are offered on sales of goods to attract buyers. It is an incentive to purchase the goods.

Debit or Credit

From studying the basics of debit and credit, balance sheet accountsBalance Sheet AccountsA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more have a healthy balance.

1. Assets accounts have a debit balance. Contra assets have a credit balance.
2. Liabilities accountsLiabilities AccountsLiability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company.read more have a credit balance. Contra liabilities have a debit balance.
3. Equity accounts have a credit balance. Contra equity has a debit balance.
4. Revenue accounts have a credit balanceCredit BalanceCredit Balance is the capital amount that a company owes to its customers & it is reflected on the right side of the General Ledger Account. Usually, Liability accounts, Revenue accounts, Equity Accounts, Contra-Expense & Contra-Asset accounts tend to have the credit balance. read more. Contra revenues have a debit balanceDebit BalanceIn a General Ledger, when the total credit entries are less than the total number of debit entries, it refers to a debit balance. A debit balance is a net amount often calculated as debit minus credit in the General Ledger after recording every transaction.read more.

Why are Contra Accounts Important?

It enables a business to record the original value on the general ledger and any reduction in the value. It allows us to see the assets’ unique historical value and the associated accumulated depreciation. It facilitates easy retrieval of the original amount and the actual decrease, which helps understand the net balance. It allows a business to present the net value based on the reduction made on the original amount.

Recommended Articles

This article has been a guide to Contra Account. Here we discuss the list of contra accounts, including Assets, Liability, Equity, and Revenue, along with examples. You can learn more about accounting from the following articles –

What is an example of a contra account?

Which is a contra account quizlet?