Balance of such accounts are under debit side, while revenue balances are under credit side. The company’s yearly depreciation expense would be $10,000 for the construction equipment. When a company gives a discount to customers in an effort to convince them to buy its goods or services, it is recorded in the discount on sales account. In footnote 3, the company reports, “Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021.” A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment.

Similarly, it allows companies to retrieve original account balances without complicated calculations. For stakeholders, looking at both accounts is also crucial in their decision-making process. Allowance for receivables is an account that companies maintain to record possible bad debts. In some balance sheets, long-term assets are grouped and the accumulated deprecation is provided as one whole amount. For some balance sheets, each line on a balance sheet includes the original cost of the asset, the accumulated depreciation amount and the book value of the item.

Is a Contra Balances Negative or Positive?

Similarly, accrued liabilities reduce the total amount of current liabilities. Including contra accounts on a balance sheet is important as it allows for a more transparent view of a company’s financial position. This is done by separating the decreases that have occurred in the contra account from the original transaction amount. This allows the reader to see both the current and historical book values for a particular asset or liability. Allowance for doubtful accounts is netted from the accounts receivable balance. The company predicts which accounts receivable won’t be paid by customers and writes those off.

While equity accounts typically appear on the balance sheet as a credit balance, the contra equity accounts have a debit balance. Assets, or what is owned by the business, are recorded in a company’s general ledger and appear on the social media marketing world 2019 balance sheet. Assets appear with a positive balance because they are recorded as a debit to the account. A negative balance, or credit entry, in an asset account, usually indicates a mistake or is accompanied by an explanation.

Obsolete Inventory

The balance sheet shows the amount in the asset section underneath the accounts receivable. The net value of both these figures is usually reported on a third line. Contra asset accounts also help companies keep their general ledgers organized. By recording reductions in a separate account, companies can get better insights into their actual accounts.

As they depreciate, their value drops because the company cannot sell them at a price that is close to their original cost. Therefore, in accordance with accounting rules, companies must depreciate these assets over their useful lives. Due to this, companies recognize accumulated depreciation, as the sum of depreciation expenses recognized over the life of an asset. The difference, which is $500, is thus listed as a discount on bonds payable and is debited to the contra liability account “discount on bonds payable.” Note that the contra liability account has a positive balance (a debit balance), and the liability account normally has a credit balance.

Understanding a Contra Account

Contra assets are a rare exception as they are recorded as a credit balance and appear as a negative number. A debit entry in a contra asset account is unnatural and most likely indicates an incorrect journal entry. They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting.

That is done by crediting accounts receivable by $100 and debiting the contra revenue account sales returns and allowances for $100. Hence, the company will have gross revenue or net sales equal to $9,900. 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. However, some asset accounts need a negative counterpart to reduce the balance of that account. The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset.