Contra Asset Account

In other words, contra accounts are used to reduce normal accounts on the balance sheet. In double-entry accounting, a credit to an asset account will represent an increase in the asset account balance, and a debit will represent a decrease in the asset account balance. Recording depreciation on plant assets affects the balance sheet and the income statement. The direct write-off method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible. The allowance for doubtful accounts is a contra asset with a normal credit balance.

Therefore, a https://1investing.in/ 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. A contra equity account reduces the total number of outstanding shares listed on a company’s balance sheet. When a company buys back its own shares from the open market, it records the transaction by debiting the treasury stock account. A company may decide to buy back its shares when management feels the stock is undervalued or because it desires to pay stock dividends to its shareholders.

Likewise, when you pay a bill, your cash account is reduced because you’re lowering the balance. When recording assets, the difference between the asset’s account balance and the contra account balance is the book value of the asset. Accordingly, the value of the contra asset account will change.

Hence, accumulated depreciation is calculated as the sum of depreciation expenses recognized over the life of an asset. The depreciation expense is expressed as the amount that has been depreciated for a single period while the accumulated depreciation is the total amount of depreciation of the asset. This simply means that accumulated depreciation is the total amount of capital or fixed asset’s cost that has been allocated as depreciation expense from the time that the asset has been used. 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. Note that the contra liability account has a positive balance , and the liability account normally has a credit balance.

Examples of Contra Asset Accounts

Hence, the book value of the liability will be the credit balance of the liability account minus the debit balance of its contra liability counterpart. As mentioned, CA accounts usually have a negative value which is the same as a credit balance. 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 contra asset accounts right now, but as your business grows, using contra asset accounts will likely become a necessity. Put simply, contra accounts are used to reduce the normal accounts on the balance sheet.

In the bookkeeping services sheet, the accounts receivable would be reflected after adjusting this allowance account. If it is the first year of operation, there is no outstanding balance in the allowance account. Contra revenue account, which is used to record the net amounts and usually has a debit balance, as opposed to the revenue account that records the gross amounts. Contra accounts are used to help a company report the original amount of a transaction as well as reductions that may have happened.

Accumulated depreciation accounts accumulate the depreciation expense provided so far about the corresponding asset. It is shown as a reduction to the asset account and is reversed when the asset is disposed of. Allowance for doubtful debts accumulates the bad debt expense that has been provided so far. If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts. A contra account is used in order to better portray the relationship between certain debits and credits within the overall financial structure of an entity.

Contra Account Definition, Types, and Example

By reflecting both accounts on the balance sheet, analysts can understand both the original price and the total decrease in value of a certain asset over time. The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet. An allowance for doubtful accounts is a contra-asset account that reduces the total receivables reported to reflect only the amounts expected to be paid. A contra liability account is a liability account that is debited in order to offset a credit to another liability account. Key examples of contra accounts include accumulated deprecation and allowance for doubtful accounts.

Accumulated depreciation is not an asset because balances stored in the account are not something that will produce economic value to the business over multiple reporting periods. Accumulated depreciation actually represents the amount of economic value that has been consumed in the past. Income statement accounts are temporary accounts, while balance sheet accounts are permanent accounts. The accounts on the left side of the accounting equation are reported on the left side of the balance sheet.

Is Accumulated Depreciation a Current Asset?

Contra accounts are used to ensure the proper valuation of these items is reflected on the balance sheet. 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. For example, assume a company made $10,000 in sales on credit. This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000. A customer returned $100 worth of items, claiming them to be defective.

• The amount in the accumulated depreciation account is deducted from the assets of a company, such as buildings, vehicles and equipment.
• Hence, accumulated depreciation is separately deducted from the asset’s value and treated as a contra asset that offsets the balance of the asset.
• Contra equity accounts are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds.
• Accumulated depreciation as a major contra account reduces the balance of the fixed and capital assets.

It is a type of contra account because the balances stored in the accumulated depreciation account represent the amount of economic value that has been consumed in the past. Accumulated depreciation is not treated as an asset or liability on the statement of condition, rather it is treated as a type of contra account. For the running of business operations, several companies depend on their capital assets such as vehicles, equipment, buildings, and machinery which tend to lose value over time. In accordance with accounting rules, these companies must record as these assets depreciate over their useful lives. Due to this, they have to recognize accumulated depreciation, as the sum of depreciation expenses recognized over the life of an asset. Hence, on the balance sheet, the accumulated depreciation is reported as a contra asset that reduces the net book value of the capital asset section.

Contra accounts serve an invaluable function in financial reporting that enhances transparency in accounting books. When the amount recorded in the contra revenue accounts is subtracted from the amount of gross revenue, it equals the net revenue of a company. In case a customer returns a product, the company will record the financial activity under the sales return account.

It appears on the balance sheet as a reduction from the gross amount of fixed assets reported. Increases in expense accounts are recorded as debits because they decrease the owner’s capital accounts. After closing entries are posted to the accounts in the general ledger, all asset and liability accounts have a balance of zero.

Contra liabilities reduce liability accounts and carry a debit balance. Contra equity accounts carry a debit balance reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities include discount on notes or bonds payable.

• Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values.
• Each year, the accumulated depreciation as a contra asset account increases by $10,000.
• Which of the following items would be considered a nonrecurring item?
• However, some asset accounts need a negative counterpart to reduce the balance of that account.

C) The account balance is needed in determining the book value of the related asset. Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable. They are used in case some customers won’t be able to pay the money they owe to the business. In accounting, assets are things of value that your business owns. Your bank account, the inventory you currently stock, the equipment you purchase, and your accounts receivable balance are all considered asset accounts. The most common type of contra account is the contra-asset account.

Treasury stock and drawing accounts are examples of contra equity accounts. 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.

In general, accounts receivable are converted into cash within the operating cycle. This is treated as loss during the period, also called bad debt expense. This loss is treated as an ordinary business expense and is deducted from the asset’s balance. Contra asset accounts provide business owners with the true value of certain asset accounts. For example, let’s say your accounts receivable balance is currently $11,500, but you’re not entirely sure that you’ll be able to collect the entire balance due. They are useful in preserving the historical value in the main account while presenting a write-down or decrease in a separate contra account that nets to the current book value.

Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. Contra revenue reduced gross revenue, resulting in net revenue. These contra revenue accounts tend to have a debit balance and are used to calculate net sales. 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.

Learn why contra accounts, when utilized correctly along with a paired account, are a crucial component of accurate accounting and financial review. 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). Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. Accumulated depreciation is a contra-asset account which is subtracted from asset accounts. Net working capital is equal to current assets minus accounts payable and accruals.

Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances. When examining the term “contra asset account,” look no further than the root of contra to get a vague grasp of the definition. Because contra means “against,” one could quickly conclude that a contra asset account is going to be an account that goes against the regular asset account on the Balance Sheet.