Contra Asset Account Definition

As asset accounts have debit balances, contra asset account will have credit balance. This is done in order to separate data in these accounts for the analysis and presentation purposes. A contra account is used for account classification and is also reported in a company’s financial bookkeeping statement alongside its corresponding or related account. When reporting a contra account in a company’s financial statement, it is reported immediately below the account it relates to or corresponds. Contra accounts have different names depending on the account they correspond.

What Is Accumulated Depreciation Classified As On The Balance Sheet?

What type of account is a contra account?

A contra account is a general ledger account with a balance that is opposite of the normal balance for that account classification. The use of a contra account allows a company to report the original amount and also report a reduction so that the net amount will also be reported.

Is Accumulated Depreciation A Current Asset Or Fixed Asset?

The contra asset account is later reduced when the expense is recorded. Business owners should understand the functions of contra accounts and their importance to maintaining accurate financial records. Taking into account the list of contra asset accounts, how would you calculate the net value of assets? If the example looks difficult, rest assured the solution is very simple.

Since the asset is part of normal business operations, depreciation is considered an operating expense. As the asset ages, it decreases in value and becomes closer to the end of its usable life. If you have the security deposit as your asset, then the investment is an asset with interest accrued in credit account interest revenue . A good example of how this works is under Adjusting Entries Illustrated where there is an example of recording interest for land. When you actually pay the interest, you can debit interest payable and credit cash . Contra accounts are also called valuation allowances because they are used to adjust the carrying value of the related asset or liability.

Say you have a total of $70,000 in accounts receivable, your allowance for doubtful accounts would be $2,100 ($70,000 X 3%). When it comes to your small business, you don’t want to be in the dark. Your accounting books should reflect how much money you have at your business.

Contains either an allowance for reductions in the price of a product that has minor defects, or the actual amount of the allowance attributable to specific sales. Contains either an allowance for returned goods, or bookkeeping the actual amount of revenue deduction attributable to returned goods. Obsolete inventory is a term that refers to inventory that is at the end of its product life cycle and is not expected to be sold in the future.

contra asset account definition

Furthermore, a contra asset account may also be regarded as a negative asset account because equalizing an asset account and contra asset account results in the asset’s net, or total, balance. Contra asset accounts are a type of asset account where the account balance bookkeeping may either be a negative or zero balance. This type of account can equalize balances in the asset account that it is paired with on a business’s balance sheet. The contra asset account has credited balances that can reduce the balance in its paired asset account.

  • Below are some examples of what the contra asset account entries look like on the balance sheet and in trial balance bookkeeping form.
  • Accumulated depreciation has a natural credit balance but it is still an asset.
  • To balance your books, you also need to use a bad debts expense entry.
  • Then, decrease your ADA account by crediting your Allowance for Doubtful Accounts account.
  • To predict your company’s bad debts, create an allowance for doubtful accounts entry.
  • To do this, increase your bad debts expense by debiting your Bad Debts Expense account.

A debit ticket is an accounting entry that indicates a sum of money that the business owes. A contra account is used in a general ledger to reduce the value of a related account when the two are netted together. A contra account’s natural balance is the opposite of the associated account. If a debit is the natural balance recorded in the related account, the contra account records a credit. Depreciation is the method of accounting used to allocate the cost of a fixed asset over its useful life and is used to account for declines in value. It helps companies avoid major losses in the year it purchases the fixed assets by spreading the cost over several years. 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.

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.

Since we are discussing doubtful accounts, the offset will be against accounts receivables. When determining how much uncollectible customer debt to write off, an associated account called a contra account is used. This helps to keep financial books straight while also allowing the company to see the amount in doubtful accounts.

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The adjustment to long-term debt, on the other hand, is a contra liability account to mortgage payable that reduces the mortgage payable for long-term debt only. A machine purchased for $15,000 will show up on the balance adjusting entries sheet as Property, Plant and Equipment for $15,000. Over the years the machine decreases in value by the amount of depreciation expense. In the second year, the machine will show up on the balance sheet as $14,000.

For instance, a contra account that relates to an accounts receivable is called a contra asset account. Transactions made to contra accounts are presented on a company’s financial statements QuickBooks under the related account. Contra accounts are important because they allow a company to follow the matching principle by recording an expense initially in the contra asset account.

This amount is typically paired with the company’s current assets on the balance sheet. An accumulated depreciation account is a type of contra asset account that is used for recording the amount of depreciation a fixed asset evolves through. For instance, a fixed asset such as machinery, a company building, office equipment, vehicles or even office furniture would be highlighted in an accumulated depreciation account. This amount may appear on a company’s balance sheet, and it can ultimately result in a reduction in the gross amount of a business’s fixed assets. When a company evaluates its financial position, a financial analyst might calculate the total amounts that the company stores in its asset accounts. While financial information on these accounts might include receivables collected, the company can also choose to include its contra asset accounts as a separate line item on the balance sheet.

contra asset account definition

Use an allowance for doubtful accounts entry when you extend credit to customers. Although you don’t physically have the cash when a customer purchases goods on credit, you need to record the transaction. 3 – Think of contra accounts like best friends that stick together. If it is accumulated amortization-equipment, it will ALWAYS be underneath the equipment account on a financial statement (balance sheet/trial balance). Dividends are monies paid to shareholders of a company for their investment. Dividends are not recorded as an expense account, but instead are a contra capital account.

When the interest is paid you could debit interest payable and credit cash. Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock. An adjunct account is an account in financial reporting that increases the book value of a liability account. Contra accounts are presented on the same financial statement as the associated account, typically appearing directly below it with a third line for the net amount.

Contra revenue account is an opposite account to revenue, which decreased gross revenue balance and the result is called net revenue. If your credit policy doesn’t reflect when to write off bad debt, below are a few tips that can help get you started. Save money and don’t sacrifice features you need for your business with Patriot’s accounting software. To reverse the account, debit your Accounts Receivable account and credit your Allowance for Doubtful Accounts for the amount paid.

Differences among methods of accounting for inventory will effect the _____ of when the expense is to be recognized, but will not effect the ___________. A contra account is an account whose balance is the opposite of a corresponding account. In finance, a contra account reduces the value of related or corresponding account. It offsets the balance of the related account, which means when the corresponding account is positive, a contra account will be negative. There are many situations where one account is used to offset another account.

Let’s say your business brought in $60,000 worth of sales during the accounting period. Based on historical trends, you predict that 2% of your sales from the period will be bad debts ($60,000 X 0.02). Debit your Bad Debts Expense account $1,200 and credit your Allowance for Doubtful Accounts $1,200 for the estimated default payments. As you can tell, there are a few moving parts when it comes to allowance for doubtful accounts journal entries. To make things easier to understand, let’s go over an example of bad debt reserve entry. When you create an allowance for doubtful accounts, you must record the amount on your business balance sheet.

Each contra asset account serves a different specific purpose, but they are have a couple things in common, too. Contra asset accounts are used to reduce the debit balance of its corresponding asset account in order to calculate a net value for each asset. ZipBooks gives you the option to create a contra asset account automatically for any new or existing asset account that you mark as depreciable. Since asset accounts are debit accounts, a contra asset account is a credit account used to offset the balance of the main debit account.

contra asset account definition

Other contra account examples can be Allowance for Doubtful Accounts , Bond discounts, which represent contra liability account, i.e. decrease bond payable account. One advantage to using an allowance account is that it can keep track of information related to each doubtful account. While this information doesn’t come out in financial statements, it isn’t lost either. Some of this documentation will include specific customers along with the uncollected amount for each. Such information can be useful for determining future credit, pursuing future debt collection, or even if you want to keep a customer. Your allowance for doubtful accounts estimation for the two aging periods would be $550 ($300 + $250). Use the percentage of bad debts you had in the previous accounting period to help determine your bad debt reserve.

What is a contra equity account?

An owner’s or stockholders’ equity account with a debit balance instead of the normal credit balance. Examples include the owner’s drawing account, a dividend account, and the treasury stock account.

Types Of Contra Asset Accounts And What They Mean

As noted with other replies, prepaid rent , accrued rent and deposits occur when rent is paid in a period other than the period in which the rent liability was incurred. For example, Sales returns and allowances is a contra-revenue account, in which sales returns and allowances are separately accounted for in order to have a separate data for such items.

Allowance For Doubtful Accounts On The Balance Sheet

Unearned revenue is a liability for the recipient of the payment, so the initial entry is a debit to the cash account and a credit to the unearned revenue account. The purpose of an accrued liability entry is to record an expense or obligation in the period when it was incurred. The journal entry for an accrued liability is typically a debit to an expense account and a credit to an accrued liabilities account.

The lender may offer the company a discount if it repays the note early. The discount on notes payable reduces the total amount of the note to reflect the discount given by the lender. By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount.

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