The balance sheet would show the piece of equipment at its historical cost, then subtract the accumulated depreciation to reflect the accurate value of the asset. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns.
Let’s go over how they work and what the main types are, and then finish with an example. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock.
If we record depreciation expense in the cost accounts directly, we will lose key information about the original cost of the assets and accumulated depreciation. To avoid this loss of important data, we record actual cost and depreciation in separate ledger accounts. To oppose the revenue made by a company, contra revenue accounts must have a debit balance. Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets. In case the contra asset account is not listed in the balance sheet, it must be listed in the footnotes of the financial statement for the users to be informed.
If this occurs, the company will debit the allowance for doubtful accounts and credit the corresponding receivables account. The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount. This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms.
Ultimately, an accumulated depreciation contra asset account helps the company reduce the gross amount of all the fixed assets within a company. The natural balance in a contra asset account is a credit balance, as opposed to the natural debit balance in all other asset accounts. There is no reason for there to ever be a debit balance in a contra asset account; thus, a debit balance probably indicates an incorrect accounting entry.
- Contra liability accounts are less commonly used than contra asset accounts.
- Get instant access to video lessons taught by experienced investment bankers.
- Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting.
A contra account offsets the balance in another, related account with which it is paired. Contra accounts appear in the financial statements directly below their paired accounts. Sometimes the balances in the two accounts are merged for presentation purposes, so that only a net amount is presented. If the related account is an asset account, then a contra asset account is used to offset it with a credit balance. If the related account is a liability account, then a contra liability account is used to offset it with a debit balance.
What Is a Contra Asset?
In bookkeeping terms, a contra asset account refers to an account which is offset against an asset account. The net of the asset and its related contra asset account is referred to as the asset’s book value or carrying value. 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. If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts. Learn why contra accounts, when utilized correctly along with a paired account, are a crucial component of accurate accounting and financial review.
- This account appears next to the current asset Accounts Receivable.
- In other words, the contra liability account is used to adjust the book value of an asset or liability.
- The most common contra account is the accumulated depreciation account, which offsets the fixed asset account.
The most common contra account is the accumulated depreciation account, which offsets the fixed asset account. Taken together, the asset account and contra asset account reveal the net amount of fixed assets still remaining. A contra asset account is not classified as an asset, since it does not represent long-term value, nor is it classified as a liability, since it does not represent a future obligation. There are three contra asset accounts that commonly appear in an organization’s chart of accounts. It is paired with the trade accounts receivable account, and contains a reserve for receivables that are unlikely to be paid by customers.
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. The allowance for doubtful accounts is a contra asset because it reduces the value of the accounts receivable (AR) account on the general ledger.
Other Contra Asset Account Examples
On the other hand, if you’re looking at a high-flying growth stock that reports new revenue growth records each quarter but has a massive allowance for doubtful accounts, there may be problems ahead. In accounting lingo, a dual entry account system includes the concept of a contra entry. It’s an entry that’s the offset or reverse of an entry that’s on the other side of the account.
Everything You Need To Master Financial Modeling
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. The accumulated depreciation account is perhaps the most common contra asset account used by business owners. Your bank account, the inventory you currently stock, the equipment you purchase, and your accounts receivable balance are all considered asset accounts. A bit more work will be required on the accountant’s or account analyst’s behalf if books are done manually without any software. The company’s contra asset account will record unusable or obsolete assets.
Contra asset accounts journal entries
Contra equity accounts are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds. Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances. Companies that issue bonds are likely to use contra liability accounts. If the bond is sold at a discount, the company will record the cash received from the bond sale as “cash”, and will offset the discount in the contra liability account. Revenue is an income statement account, but it flows through to the equity section of retained earnings as well.
Presentation of Contra Assets
Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. 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. 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. Both these aspects of the transaction are although entered in the same account, are mentioned in separate columns. This improvement in the accounting details and transparency is good for any business in multiple ways.
The natural balance of a contra asset account, in this case, is exactly the opposite of the balance of the related account. 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.
These contra revenue accounts tend to have a debit balance and are used to calculate net sales. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. A second example of a what is deferred revenue is Accumulated Depreciation. This type of contra asset accounts is used for recording the depreciation within the timeframe of a fixed asset.
When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset. For example, if the balance of accumulated depreciation increases from $20,000 to $50,000, this means that the depreciation expense amounts to $30,000, which will be listed in the income statement.