Contra Asset Account Definition, Examples, List of Accounts

When a contra asset transaction is created, the offset is a charge to the income statement, which reduces profits. Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement. Examples of revenue contra accounts are Sales Discounts, Returns and Allowances. However, the http://dancelib.ru/baletenc/item/f00/s02/e0002975/index.shtml “Allowance for Doubtful Accounts” (or “Allowance for Uncollectible Accounts”) is a contra account related to the concept of bad debts. This contra-asset account reduces the accounts receivable balance on the balance sheet to its net realizable value. The Allowance for Doubtful Accounts carries a credit balance that reduces the total amount of accounts receivable to show the amount that the company expects to collect.

What Is a Contra Account?

• The difference between an asset’s account balance and the contra account balance is known as the book value.
• A contra account is an account that companies use to reduce the value of a related account.
• However, it’s important to keep in mind that you can create any contra account you want to more clearly describe your business — this is not an exhaustive or definitive list.
• The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.
• Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory.

The national brand gives the grocery store cash, reducing the overall cost of printing the flyer. The purpose of the Allowance for Doubtful Accounts is to track the reduction in the value of the asset while preserving the historical value of the asset. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting.

Presentation of Contra Accounts

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 for doubtful accounts is also recorded as a debit to increase bad debt expense. Contra http://metalchurchmusic.com/mp3.asp Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns.

Contra liability account example

By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company. For example, if a company just reported equipment at its net amount, users would not be able to observe the purchase price, the amount of depreciation attributed to that equipment, and the remaining useful life. Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset. This depreciation is saved in a contra asset account called accumulated depreciation.

What Is a Contra Asset?

Usually, companies add to the accumulated depreciation account after every accounting period. Although contra-asset accounts have credit balances, they do not appear in liabilities or equity. 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 http://britishbullmastiffleague.com/pages/clubhistory.html your accounts receivable balance. Writing off your obsolete inventory in this manner allows you to expense the cost of the obsolete inventory while also decreasing your current inventory balance using the contra asset account. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete.

Contra Asset Accounting & Examples

At this point, it isn’t known which accounts will become uncollectible so the Accounts Receivable balance isn’t adjusted. Instead, an adjusting journal entry is done to record the estimated amount of bad debt. Accumulated Depreciation is a contra asset that pairs with Fixed Assets.

• This depreciation is saved in a contra asset account called accumulated depreciation.
• A liability that is recorded as a debit balance is used to decrease the balance of a liability.
• Sometimes, the current value of a note receivable will fall compared to its face value.
• 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.
• But sometimes, dissimilar transactions are important to consider together within a ledger.
• 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.

How to Calculate Straight Line Depreciation

This type of reporting allows anyone analyzing the balance sheet to understand much more about the company and its assets than if they were to simply look at the net value of the depreciated asset. 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. As mentioned, companies do not represent these accounts on the balance sheet. However, they will still appear on the notes to the financial statements with necessary disclosures. 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.

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. A company receives rebates for advertising it does on behalf of brands it carries in its stores. For example, a grocery store displays advertisements for a national brand in its weekly flyer.

Companies that hold inventories for a long time may face accumulating obsolete inventory. When the two balances are offset against each other they show the net balance of both accounts. 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 points below explain the importance of passing a contra account entry. These accounts facilitate auditing and financial analysis by providing a detailed breakdown of adjustments made during a specific accounting period.