To illustrate, let's use the contra asset account Allowance for Doubtful Accounts, which is associated with the asset account Accounts Receivable. If the balance in the Allowance account is a credit of $2,000 and the Accounts Receivable account has a normal debit balance of $40,000, the net realizable value of the receivables is $38,000. The use of this contra account allows 1) the original amount of uncollected sales invoices to continue to be reported in Accounts Receivable, and 2) the net amount of $38,000 to be reported on the balance sheet as the amount that will be turning to cash.
Accumulated Depreciation of Equipment is a contra asset account that is associated with the plant asset Equipment. If the balance in the account Accumulated Depreciation is a credit of $50,000 and the Equipment account has a normal debit balance of $92,000, the carrying amount (or book value) of the equipment is $42,000.
Sales Returns and Allowances is a contra revenue account that is associated with the revenue account Sales. If the balance in this contra account is a debit of $3,000 and the Sales account has a normal credit balance of $400,000, the net sales are $397,000. The contra account enables the company's management to see that its customers found $3,000 of the $400,000 of sales to be unacceptable.
Learn Bookkeeping: Gain unlimited access to our bookkeeping seminar videos, bookkeeping proficiency exams, bookkeeping cheat sheet, visual tutorials, and more when you upgrade to PRO.