Contra Account Definition: Types and Example

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contra asset account

Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Therefore, a contra asset can be regarded as a negative asset account. Offsetting the asset account with its respective contra asset account shows the net balance of that asset. When a contra asset account is first recorded in a journal entry, the offset is to an expense.

  • Contra accounts are used to reduce the original account directly, keeping financial accounting records clean.
  • Globally Accepted Accounting PrinciplesGAAP are standardized guidelines for accounting and financial reporting.
  • Balance Sheet AccountsA balance sheet is one of the financial statements of a company that presents the shareholders‘ equity, liabilities, and assets of the company at a specific point in time.
  • In this way, the historical cost, the amount of write-off, and the book value of an asset can always be seen on the balance sheet.
  • You can estimate the total to record in the allowance for doubtful accounts based on uncollectible revenue totals from the previous year or you can conservatively estimate the amount.

The contra asset account then allows recording of the value factoring in depreciation. Inventory obsolescence is an expense account, while the allowance for obsolete inventory is a contra asset account, which aims to reduce the inventory valuation on your balance sheet.

What is a contra asset account?

Contra assets allow for more granular visibility on the balance sheet by maintaining historical costs and independent values rather than reducing the original account directly. By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes. For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately.

  • Accordingly, the value of the contra asset account will change.
  • The contra asset account carries a credit balance because an asset account usually has a debit balance.
  • Likewise, when you pay a bill, your cash account is reduced because you’re lowering the balance.
  • To oppose the revenue made by a company, contra revenue accounts must have a debit balance.
  • Contra accounts appear on the same financial statement as the related account.

The adjusted trial balance lists the account balances segregated by assets and liabilities. A contra asset is an account that when increased, decreases the value of a related asset on the books. After closing entries are posted to the accounts in the general ledger, all asset and liability accounts have a balance of zero.

How Contra Asset Accounts Work

Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company. Whether reported as separate lines on the financial report or as a cumulative value, the net amount of the pair of accounts is called the “net book value” of the individual asset. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. An impairment in accounting is a permanent reduction in the value of an asset to less than its carrying value. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting.

Do I have to use a contra asset account for my receivables?

You don’t have to, yet even a small business will benefit by using the contra asset account for accounts receivable. This eliminates the need to write off large accounts receivable balances at year end since they’ve already been accounted for.

That is to completely or partially offset the balance of their related asset accounts. Asset accounts usually have a positive value which is the same as a debit balance. You may not need to use right now, but as your business grows, using contra asset accounts will likely become a necessity. Far less common is the obsolete inventory reserve, which reduces the overall inventory value on the balance sheet. This contra account holds a reserve, similar to the allowance for doubtful accounts. For each debit against the inventory account, there will be a corresponding credit against the obsolete inventory contra account.

Overview: What is a contra asset account?

Revenue AccountRevenue accounts are those that report the business’s income and thus have credit balances. Revenue from sales, revenue from rental income, revenue from interest income, are it’s common examples. Accumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset’s purchase price and its carrying value on the balance sheet. 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. Contra EquityA contra equity account has a debit balance instead of a credit. Now let’s focus our attention on the two most common contra assets – accumulated depreciation and allowance for doubtful accounts.

contra asset account

The contra revenue accounts commonly used in small-business accounting include sales returns, sales allowance and sale discounts. A contra revenue account carries a debit balance and reduces the total amount of a company’s revenue. The amount of gross revenue minus the amount recorded in the contra revenue accounts equal a company’s net revenue. A transaction is made under the sales return account when a customer returns a product to the company for a refund.

What is Contra Account?

Income statement accounts are temporary accounts, while balance sheet accounts are permanent accounts. Increases in expense accounts are recorded as debits because they decrease the owner’s capital accounts. The accounts on the left side of the accounting equation are reported on the left side of the balance sheet. Discount on Notes Payable is a contra account to Notes Payable on the balance sheet. There are many situations where one account is used to offset another account. One common example is accumulated amortisation, which is a contra-asset account.

The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. The sales allowance shows the discounts given to customers when returning the product. This is done to entice customers to keep products instead of returning them. For example, items with slight faults being sold with a discount.

These contras reduce the equity account and carry a debit balance. Contra equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. 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. The most common type of contra account is the contra-asset account. This type is paired with the asset account, which allows a business to record the original price or value of the asset at time of purchase.

contra asset account

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