Could someone please give me a simple example/s of contra account and a simple explanation of what it is. Thanks
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Could someone please give me a simple example/s of contra account and a simple explanation of what it is. Thanks
What is quoted below is from the following site. contra account definition
Quote:
Definition 1
Asset account that offsets an associated account. For example, accumulated depreciation account that reduces the original cost of an asset to arrive at its book value. Also called contra asset or valuation allowance.
Definition 2
Credit account that can be offset against another. For example, if two firms owe each other, they can settle the debt by making one payment to the one who is owed more.
Definition 3
Liability account that reduces an associated account. For example, bond discount account that reduces the bonds payable account to arrive at the bond's carrying value.
contra account is in the Accounting & Auditing and Banking, Commerce & Finance subjects.
contra account appears in the definitions of the following terms: valuation allowance, purchase returns and allowances, contra asset and notes receivable discounted
Contra account refers to those entries in which only bank and cash accounts are involved... for e.g.. Cash deposited in bank is a contra entry... ie. Here bank is dr and cash is cr. No other accounts other than cash and bank r involvedQuote:
Originally Posted by tonie
In the U.S. anyway, a contra account does not refer to entries only involving bank and cash accounts. In fact, it has nothing to do with that.
The info Clough gave you somewhat covers the topic. Under normal circumstances, definition 2 wouldn't count. It's 1 &3 you're concerned with. Those are two good and common examples.
A contra account is any account that offsets any other account, whether it be asset, liability or otherwise. You have five classifications of accounts and all five can have contra accounts. It's usually because we want to reduce the value in an account, but do not (for various reasons) want to take the amount directly out of that account. So instead we create a separate account that is the opposite balance. Contra accounts always "go with" some other account and reduce its balance.
If we had a debit account, a contra account would be a credit. (Credits reduce debit accounts.) If we had a credit account, then the contra account would be a debit. It's always the opposite of the normal balance for that type of account, because it is meant to reduce a balance.
Accumulated depreciation is a very commonly used contra account, and one that is covered fairly early in accounting classes. A discount on a bond payable is another example, but is not necessarily covered in a beginning accounting class and a more unusual example. But still a contra account nonetheless. Since I don't know your level of accounting, I'd prefer stay away from things like bonds.
Another early learned contra account is either drawing or dividends. (Drawing for sole proprietorship. Dividend for corporations.) These are when the owner is getting money out of the net income of the company, so it reduces net income. Since net income is a credit, that contra account is a debit.
Sales Returns is another example. Sales being a revenue, is a credit account. Returns will reduce the net sales, right? But most companies would like to keep track of the returns separately, just for record-keeping purposes. So rather than pull the returns right off Sales by debiting it, we use the contra account Sales Return (debit account). It will offset the Sales on the income statement.
Morgaine, thank you for your explanations.
You're welcome. :-)
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