Home Accountant Contra Accounts, Normal Balances, and Rules of Accounting – 3 Workhorses of Bookkeeping

Contra Accounts, Normal Balances, and Rules of Accounting – 3 Workhorses of Bookkeeping

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While everyone and business owners understand the overall accounts that come in the fiscal reports, many proprietors, executives, along with other non-accounting personnel frequently disregard the less popular accounts which are known as Contra Accounts.

Contra Accounts are accounts which are matched or paired to some related account and subtracted from this. These bookkeeping accounts are incorporated within the company’s chart of accounts. Frequently they could just be known as ledger accounts or gl accounts.

When we see inside a balance sheet:

Equipment ………………………………$120,000

Less:Accrued depreciation……….. 20,000….. 100,000

Accrued depreciation may be the ‘contra account,’ and ‘Equipment,’ the attached account.

Listed here are the contra accounts that often come in the total amount sheet:

Accrued depreciation………………………. contra-asset

Accrued depletion………………………….. contra-asset

Drawing……………………………………………. contra-capital

Allowance for doubtful accounts………………. contra-asset

Discount on bonds payable………………………contra-liability

Listed here are the contra accounts that often come in the earnings statement:

Sales returns and allowances…………………. contra-revenue

Sales discounts…………………………………… contra-revenue

Purchase returns and allowances…………….. contra-cost

Purchase discounts………………………………. contra-cost

All accounts have what is known a ‘Normal Balance.’ The standard balance of the account corresponds aside where the account is elevated. To completely appreciate this concept, let us possess a refresher from the rules of accounting:

Rule of Accounting 1, for assets: increases in assets are recorded by debits towards the asset accounts. Decreases in assets are recorded by credits towards the assets accounts.

Rule of Accounting 2, for liabilities: increases in liabilities are recorded by credits towards the liability accounts. Decreases in liabilities are recorded by debits towards the liability accounts.

Rule of Accounting 3, for owner’s equity: increases in owner’s equity are recorded by credits towards the owner’s equity accounts. Decreases in owner’s equity are recorded by debits towards the owner’s equity accounts.

Based on the above rules, assets are elevated by debits liabilities and owner’s equity by credits. The result is then the normal balance of assets is debit, as well as for liabilities and owner’s equity accounts the standard balance is credit.

Now, within the situation from the contra accounts, they’re going to have an ordinary balance that’s the complete opposite of their related account. When we concentrate on the above example where we show Equipment $120,000. We are able to now state that the standard balance of Accrued depreciation is credit (the alternative from the related account Equipment).

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