Definition of contra asset account in Accounting
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For instance, a contra account that relates to an accounts receivable is called a contra asset account. Most accountants choose to record the depreciation over the useful life of an item in the accumulated depreciation contra asset account, which is a credit account. The balance sheet would show the piece of equipment at its historical cost, then subtract the accumulated depreciation to reflect the accurate value of the asset. The complete accounting equation based on the modern approach is very easy to remember if you focus on Assets, Expenses, Costs, Dividends . All those account types increase with debits or left side entries. Conversely, a decrease to any of those accounts is a credit or right side entry.
- The company predicts which accounts receivable won’t be paid by customers and writes those off.
- As mentioned, CA accounts are usually listed below their matching asset accounts, and the net values of those assets are written next to the contra accounts.
- Allowance for doubtful accounts is a contra asset account used to create an allowance for customers who are not expected to pay the money owed for purchased goods or services.
- This is deducted from the total of receivables to get the net receivables.
- Thus, netting off both will result in the final amount for the account.
First the debit column is totaled, then the credit column is totaled. The account balance is calculated by subtracting the smaller total from the larger total. Only one subtraction is needed, simplifying calculations before the availability of computers. The allowance for doubtful accounts is not specifically reported, but the 10 reported that the allowance is immaterial to the amount. This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms.
Contra liability accounts
A contra asset is a negative asset account that offsets the asset account with which it is paired. The purpose of a contra asset account is to store a reserve that reduces the balance in the paired account. By stating this information separately in a contra asset account, a user of financial information can see the extent to which a paired asset should be reduced. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns.
- For her businesses, Nora is responsible for finances, marketing, operations, and fundraising.
- Examples include trust accounts, debenture, mortgage loans and more.
- Usually, companies add to the accumulated depreciation account after every accounting period.
- If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming.
In response, the firm should decrease its accounts receivable and revenue balances. That is done by crediting accounts receivable by $100 and debiting the contra revenue account sales returns and allowances for $100. Hence, the company will have gross revenue or net sales equal to $9,900. Including contra revenue accounts is important in the income statement because it shows the original amount of sales the firm has made, along with any factor that has reduced that amount. Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks. Note that the contra liability account has a positive balance , and the liability account normally has a credit balance.
Example of a Contra Account
If the company pays before the maturity date, the granter may offer some reduction or discount, which is recorded in the contra account. AssetDebits Credits XThe “X” in the debit column denotes the increasing effect of a transaction on the asset account balance , because a debit to an asset account is an increase. The asset account above has been added to by a debit value X, i.e. the balance has increased by £X or $X. Likewise, in the liability account below, the X in the credit column denotes the increasing effect on the liability account balance , because a credit to a liability account is an increase.
Instead of debiting the asset account directly, the contra asset account balance will be credited separately. Another contra real estate bookkeeping asset account is Allowance for Doubtful Accounts. This account appears next to the current asset Accounts Receivable.
Contra asset accounts journal entries
For example, a company may have an asset account for inventory, but also have a contra account for inventory allowances to reduce the value of the inventory to its net realizable value. This allows for a more accurate representation of the company’s financial position. A contra account is a special type of account that reduces the value of another account.
However, it will also have a negative accumulated depreciation of $60,000, offsetting that cost. As mentioned, CA accounts are usually listed below their matching asset accounts, and the net values of those assets are written next to the contra accounts. The difference, which is $500, is thus listed as a discount on bonds payable and is debited to the contra liability account “discount on bonds payable.”
Often when a company extends goods on credit, management expects some of those customers not to pay and so anticipates writing off bad debt. While accumulated depreciation is the most common contra asset account, the following also may apply, depending on the company. A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger. A contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit balance.
Contra asset accounts are the most common type of contra account. Therefore, a contra asset account will show the opposite balance – the credit balance. A contra asset account includes allowance for doubtful debt accounts and accumulated depreciation accounts. An accumulated depreciation account is used to record depreciation of fixed assets of a company such as land, machinery, equipment and buildings. This account appears on the asset side of the balance sheet as a reduction from the fixed assets. All accounts also can be debited or credited depending on what transaction has taken place.
What Does Contra Account Mean?
By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount. Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset. For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets. The allowance for doubtful accounts is a contra asset because it reduces the value of the accounts receivable account on the general ledger.
