Contra Account
| Contra accounts are separate accounts reported on the balance sheet that reduce or increase the value of the main asset or liability account. |
The account listed with the main asset account is called a contra asset account. Similarly, the account listed with the main liability account is called a contra liability account. The contra account is not an asset or liability in itself, but an account used to adjust the carrying amount of the related asset or liability account.
The word contra means contrariwise; or on or to the contrary. Since asset accounts are debit accounts, a contra asset account is a credit account used to offset the balance of the main debit account.
Examples of Contra Accounts
Examples of contra asset accounts are accumulated depreciation, used to report fixed assets at the book value (original cost – depreciation), and allowance for doubtful accounts, used to report the accounts receivable asset with the adjustment for bad debt estimates. Allowance for doubtful accounts is thus used to report accounts receivable at the net realizable value, or the amount of cash the company expects to receive for the asset. The balance sheet for Sunny Sunglasses Shop shows the following contra asset account reported with accounts receivable:
Contra Asset Account: Allowance for Doubtful Accounts
| Accounts Receivable | 21,900 |
| Allowance for doubtful accounts | (700) |
| Receivables, net | 21,200 |
Examples of contra liability accounts are discounts to notes and bonds payable, and the short-term portion of long-term debt. Since a note or bond payable is a liability and a credit account, the contra liability account for the main account is a debit account used to offset the balance of its related liability account. The balance sheet for Sunny Sunglasses Shop shows the following contra liability account reported with the mortgage payable:
Contra Liability Account: Short-term portion of mortgage payable
| Mortgage Payable | 18,000 |
| Short-term portion due | (900) |
| Mortgage Payable, long-term | 17,100 |
In this case the $900 is a real short-term liability reported separately on the sample balance sheet as a current portion of long-term debt coming due. The adjustment to long-term debt, on the other hand, is a contra liability account to mortgage payable that reduces the mortgage payable for long-term debt only.
Contra accounts are also called valuation allowances because they are used to adjust the carrying value of the related asset or liability.
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True or False
a. The use of a contra account asset allows the market value of the asset to be recorded in the fixed asset account T F
b. The decision to dispose of a fixed asset is based mainly on the usefulness of the asset rather than its market value T F
appreciate the help.
pc
Hi Patrick,
You can just record the interest as an interest expense. A good example of how this works is under Adjusting Entries Illustrated where there is an example of recording interest for land. When you actually pay the interest, you can debit interest payable and credit cash (the interest expense remains for the period).
If you have the security deposit as your asset, then the investment is an asset with interest accrued in credit account interest revenue (debit interest receivable or cash).
Kenneth
kenneth
i did pretty well in high school accounting class, but that was more than a few years ago and now i’m attempting the books for my investment in a santa cruz, ca, triplex having done essentially no bookkeeping in the meanwhile.
Not much is said, about security deposits, in books i have.
Thanks for your kind correction.
patrick
Historical interest rates are listed below:
Interest Rates For County of Santa Cruz, Capitola, Watsonville, and the City of Santa Cruz
January 1, 2002 – December 31, 2002 1%
January 1, 2003 – December 31, 2003 .58%
January 1, 2004 – December 31, 2005 .32%
January 1, 2006 – December 31, 2006 .43%
January 1, 2007 – December 31, 2007 .34%
January 1, 2008 – December 31, 2008 .31%
January 1, 2009 – December 31, 2009 .23%
January 1, 2010 – December 31, 2010 .10%
January 1, 2011 – December 31, 2011 .06%
The City of Capitola has no interest requirement for 2011.
Thanks for the reply — i’ll send another email with apologies for
my ignorance
Hi Patrick. First show me where I can get some interest on my security deposit 🙂
The interest expense would not be reversed since it is an actual expense recorded for the period.
So the interest expense and interest payable can be listed separately to the security deposit amount owed as interest obligation on the funds deposited.
When the interest is paid you could debit interest payable (or interest expense if paid immediately with cash) and credit cash.
A contra account is generally a direct reduction not due to interest expense, which is an actual liability outside of the account, but other factors directly affecting the asset or liability value (e.g. bad debt, depreciation, etc.)
Kenneth
It seems that another example of a contra account would be an expense account associated with a security deposit (eg. rental property). The interest owed on a security deposit would show as a debit in the expense account until the tenant moved and the account settled. at that time, cash is debited and the expense account credited for the interest owed/paid.