What is a Contra Asset Account?

What is a Contra Asset Account

Contra accounts play an important role in accounting by helping businesses track certain aspects of their finances more accurately. For example, contra revenue accounts can be used to track the full cost of sales less any discounts or returns. It can help businesses see the complete picture of their income and expenses. Contra assets are accounts in the general ledger—where you enter your transactions—that carry a balance used to offset the account with which it is paired. Instead of debiting the asset account directly, the contra asset account balance will be credited (reduced) separately. Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable.

Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Accumulated depreciation reflects the reduction in value of a fixed asset.

Allowance for Doubtful Accounts

By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company. Contra asset accounts allow users Quicken for Nonprofits: Personal Finance Software to see how much of an asset was written off, its remaining useful life, and the value of the asset. Contra asset accounts are useful tools in double-entry accounting.

It is not classified as a liability since it does not represent a future obligation. Even small businesses benefit immensely from contra asset accounts. Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset. Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. The two most common examples of contra asset accounts are the accumulated depreciation contra account, and the allowance for doubtful debts contra account.

Definition of a Contra Account

When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance https://business-accounting.net/role-of-financial-management-in-law-firm-success/ for doubtful accounts is also recorded as a debit to increase bad debt expense. A second example of a contra asset account is Accumulated Depreciation.

This would allow the company to track the amount of money that has been borrowed. The contra liability account would be used to offset the liability account on the balance sheet. The company estimates that it will not be able to collect 1,000 from its customers. The allowance for doubtful accounts is a contra asset account How to Start Your Own Bookkeeping Business: Essential Tips that is used to offset Accounts Receivable on the balance sheet. 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.

About the Author

Hopefully, you have a pretty clear idea of contra asset meaning—no need to ask to define contra asset accounts anymore. Including contra asset accounts on your balance sheets can be hugely beneficial for your business. Contra asset accounts are asset accounts where the balance is a credit balance. They are called “contra” asset accounts because these accounts are contrary to normal accounts. Note that the contra liability account has a positive balance (a debit balance), and the liability account normally has a credit balance. 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.

  • It’s an entry that’s the offset or reverse of an entry that’s on the other side of the account.
  • The credit balance in this account is amortized or allocated to Interest Income or Interest Revenue over the life of a note receivable.
  • A customer returned $100 worth of items, claiming them to be defective.
  • Contra asset accounts are, as the name implies, accounts that are contrary to popular belief.
  • 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 assets are always shown on the left-hand side, and the liabilities are always displayed on the right-hand side. A Contra liability account is an account that is used to offset another liability account on the balance sheet. Contra liability accounts are typically used for bonds, notes payable, and other indebtedness. 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. You’ll continue to use the contra asset account until the equipment has been completely depreciated, retired, or sold.

Contra Asset

When a contra asset transaction is created, the offset is a charge to the income statement, which reduces profits. To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts. Since it is a contra asset account, this allowance account must have a credit balance (which is contrary to the debit balances found in asset accounts). The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable. Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000.

  • Setting up contra asset accounts is easy with accounting software.
  • This helps the firms to evaluate the book value of their assets and liabilities.
  • He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.
  • For example, an asset was purchased by a company for $100,000 – that is, the historical cost of the asset was $100,000 – and its contra asset counterpart has a balance of $30,000.
  • All in all, contra accounts are an important tool for businesses to use to understand their financial standing better.
  • Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods.

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