What is contra accounts?
Six Basic Types of Accounts
The six basic types of accounts used in a typical accounting system are:
• asset accounts
• liability accounts
• equity accounts
• revenue or income accounts
• expense accounts
• contra accounts
Asset accounts: represent the different types of economic resources owned by a business, common examples of asset accounts are cash, cash in bank, equipment, building, inventory, prepaid rent, goodwill, accounts receivable.
Assets are usually broken down into three categories:
• Current assets
• Fixed assets
• Intangible assets
Liability accounts: represent the different types of economic obligations by a business, such as accounts payable, bank loan, bonds payable, accrued interest.
Current liabilities are liabilities which are scheduled to be paid within a short period of time, usually less than a year.
Long-term liabilities (sometimes called fixed liabilities) are liabilities of a more permanent nature like loans that are not due in the current year (long-term debt).
Equity accounts: represent the residual equity of a business (after deducting from assets all the liabilities).
In the case of a start-up company totally financed by the founder, it is often called owner’s equity and represents the capital provided by the owner. If the company is a corporation and stock has been issued to the owner and to others, it is often called stockholders’ equity.
Revenue accounts or income: represent the company's gross income before expenses are deducted.
Common examples include sales, service revenue, commissions, and interest income.
Expense accounts: represent the company's expenditures to enable itself to operate.
Common examples are employee costs (payroll and fringe benefits), supplies, software, telephone bills, electricity and water, rentals, depreciation, bad debt, interest, and insurance.
Contra-accounts: from the term ciccia, meaning to deduct, these accounts are opposite to the other five above mentioned types of accounts.
For example, a contra-asset account is accumulated depreciation. This label represents deductions to a relatively permanent asset like a building. It accumulates an annual charge in recognition that a fixed asset like a building is not used up over the course of a year, but that it has a useful life measured in multiple years.
Log in to save your progress and obtain a certificate in Alison’s free Preparing to Manage - Skills and Practices online course
Sign up to save your progress and obtain a certificate in Alison’s free Preparing to Manage - Skills and Practices online course
Please enter you email address and we will mail you a link to reset your password.