Contra asset account definition

Contra Asset Account Examples

The term “contra” means “against,” which perfectly describes the role these accounts play in your finances – they are going against the norm. This account serves two purposes — tracking total depreciation expenses while providing you with the accurate book value of the asset being depreciated. GAAP, the allowance How to account for grant in nonprofit accounting for doubtful accounts represents management’s estimate of the percentage of “uncollectible” accounts receivable (i.e. the credit purchases from customers that are not expected to be paid). A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment.

Contra Asset Account Examples

Usually, credit balances include items from one of those two natures. Contra accounts are a significant part of a company’s financial statements. These accounts can significantly reduce balances on the balance sheet. A contra asset is a negative asset account that offsets the asset account with which it is paired.

Everything You Need To Build Your Accounting Skills

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. If you offer credit terms to your customers, you probably know that not all of them will pay. Creating this contra asset account builds in a safeguard against overstating your accounts receivable balance.

For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance. Contra asset accounts also provide a clear picture of the companies’ accumulation of assets. Similarly, these accounts can also be essential in various calculations. However, there are some prevalent contra-asset accounts that may exist for all companies.

Is Treasury Stock a Contra Account?

The account offsets the balance in the respective asset account that it is paired with on the balance sheet. This type of contra asset accounts is used for recording the depreciation within the timeframe of a fixed asset. In the realm of accounting, various techniques are used to ensure financial statements provide an accurate and comprehensive view of a company’s financial health. One such method is the use of contra accounts, a type of account that directly correlates and offsets a related account.

Therefore, contra-asset accounts differ from other accounts that have a credit balance. 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. An asset account which is expected to have a credit balance (which https://quickbooks-payroll.org/nonprofit-accounting-explanation/ is contrary to the normal debit balance of an asset account). For example, the contra asset account Allowance for Doubtful Accounts is related to Accounts Receivable. The contra asset account Accumulated Depreciation is related to a constructed asset(s), and the contra asset account Accumulated Depletion is related to natural resources.

Types of Contra Accounts

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. To offset this, the allowance for doubtful accounts balance is adjusted via a credit, while the bad debt account is debited to balance out the AR account. When combined, the AR account and the allowance for doubtful accounts contra assets offer a projection of how much net cash is expected to be received from outstanding accounts. For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets.

This account offsets the balance in the respective asset account that they pair with on the balance sheet. Asset accounts always maintain a debit balance, so anytime that you increase the value of an asset, such as when you deposit customer payments or invoice a customer, that asset account is debited or increased. Likewise, when you pay a bill, your cash account is reduced (credited) because you’re lowering the balance. The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline. A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity).

Recording Contra Accounts

The accounting entries for accumulated depreciation are as follows. If you keep a lot of inventory in stock, chances are that some of the inventory will become obsolete. This frequently happens to manufacturing companies that sell products with an expiration date since any inventory remaining in stock past the expiration date quickly becomes obsolete. 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. We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R).

  • The accumulated depreciation account plays a vital role in representing the accurate value of an asset in the financial statements.
  • We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R).
  • Contra liability accounts are special accounts in the liabilities section of the balance sheet.
  • Sometimes, it is important to keep the original balance of the accounts and create the contra accounts to be able to calculate the net value of the account.
  • Allowance for receivables is an account that companies maintain to record possible bad debts.
  • The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline.

It usually nets off against related accounts and provides an opposite effect to the balance. Therefore, contra accounts are the reverse accounts that decrease a specific account’s balance. The proper size of a contra asset account can be the subject of considerable discussion between a company controller and the company’s auditors. The auditors want to ensure that reserves are adequate, while the controller is more inclined to keep reserves low in order to increase the reported profit level. Contra asset accounts can be used in a variety of areas, but there are three contra asset examples that you should pay close attention to.

Is a Contra Account a Debit or Credit?

However, it will also have a negative accumulated depreciation of $60,000, offsetting that cost. On the other hand, accumulated depreciation is a contra-asset account. This account will offset the asset’s value by $10,000 each year. For example, if an account has a debit balance, a contra account will have a credit balance. Thus, netting off both will result in the final amount for the account. A contra account is an account that companies use to reduce the value of a related account.

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