Bookkeeping

6 Types Of Contra Asset Accounts And What They Mean

Contra Asset Account

Accumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset’s purchase price and its carrying value on the balance sheet. Accounts Receivable AccountAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment.

  • This account only relates to a company’s intangible assets rather than tangible.
  • Instead, it is reported at its full amount with an allowance for bad debts listed below it.
  • Offsetting the asset account with its respective contra asset account shows the net balance of that asset.
  • Put simply, contra accounts are used to reduce the normal accounts on the balance sheet.
  • This type of asset account is referred to as “contra” because normal asset accounts might include a debit, or positive, balance, and contra asset accounts can include a credit, or negative, balance.
  • If a company has a high or fast-growing allowance as a percentage of accounts receivable, keep a close eye on it.

While accumulated depreciation is the most common Contra Asset Account, the following also may apply, depending on the company. Lots of assets, such as buildings, vehicles and equipment, wear down and lose value over time.

How Are Contra Accounts Used And Reported?

Sales allowance represents discounts given to customers to entice them to keep products instead of returning them, such as with slightly defective items. The sales discount account represents the discount amount a company gives to customers as an incentive to purchase its products or services. For example, an accounts receivable’s contra account is a contra asset account.

  • Contra Accounts help show the net value of an account in the financial statements.
  • This amount is typically paired with the company’s current assets on the balance sheet.
  • The lender may offer the company a discount if it repays the note early.
  • In other words, contra accounts are used to reduce normal accounts on the balance sheet.
  • Another reason to include contra accounts on a balance sheet is to preserve the historical value of the main account.
  • 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.

For example, the allowance for doubtful accounts indicates money owed from customers a company does not expect to receive. There can be multiple reasons why the company does not expect to receive this owed money. Most financial disclosures dictate the amount expected to be lost, how the company came up with the figure, and any financial impact this lost capital will have on the business.

Contra asset accounts are prepared so that an asset’s gross value and deductions can be shown separately. The accounting rules applicable to contra asset accounts are exactly opposite to asset accounts. Contra asset accounts are credited when these are increased and debited when these are decreased.

What Are The Types Of Contra Asset Accounts?

Accumulated depreciation is a contra-asset account which is subtracted from asset accounts. Return on sales – These accounts will show the value of a returned product. This can be seen as a refund or the loss of revenue for the returned goods. Businesses use sales returns accounts to track product issues and customer trends.

Debit depreciation expense for $16,875 and credit accumulated depreciation-equipment for $16,875. Debit accumulated depreciation -equipment for $16,875 and credit depreciation expense for $16,875. Debit depreciation expense for $18,625 and credit accumulated depreciation-equipment for $18,625. In a balance sheet, accumulated depreciation would be reflected as a reduction from the asset’s account so that the net balance is evident. Allowance for doubtful accounts is shown as a reduction from the gross accounts receivable.

Contra Asset Account

Now let’s focus our attention on the two most common contra assets – accumulated depreciation and allowance for doubtful accounts. 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. Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. A classic example of human error creating a credit balance on in an asset account is bouncing a check. If you write a check for more than is in your bank account you are going to going to go from a debit balance to a credit balance.

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The accounting entry for this is debit, bad debt expense and credit to accounts receivable. Here, accounts receivable are decreased in the period when bad debt expense is incurred. However, bad debt expense can arise to the sales made in earlier periods. The accumulated depreciation account appears on the balance sheet as a credit and is a reduction from the total amount listed for fixed assets. The book value of an asset is the value of the asset recorded in the company’s balance sheet. Contra accounts are needed for determining the book value of assets held by a company. For accounting purposes, the book value is realized by the difference between the asset’s account balance and contra account balance.

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Contra Asset Account

The difference between an asset’s balance and the contra account asset balance is the book value. Now, for contra revenue accounts there are sales discounts, sales allowances, or sales returns.

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. The use of contra accounts ensures the accuracy of financial accounting records, as the value of the original accounts is not directly reduced. In the event that a contra account is not utilized, it can become increasingly troublesome to determine historical costs, which makes tax preparation time-consuming and difficult. Contra Asset AccountA contra asset account is an asset account with a credit balance related to one of the assets with a debit balance. When we add the balances of these two assets, we will get the net book value or carrying value of the assets having a debit balance. For both contra asset accounts, the entry is a debit to an expense and the credit is to the contra asset account.

Is Accumulated Depreciation A Current Asset Or Fixed Asset?

Allowance for doubtful accounts is a contra asset account used to create an allowance for customers that are not expected to pay the money owed for purchased goods or services. The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables. 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. Contra equity reduces the total number of outstanding shares on the balance sheet.

For each debit against the inventory account, there will be a corresponding credit against the obsolete inventory contra account. 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 separately. A contra asset is a negative asset account that offsets the asset account with which it is paired. The purpose of a contra asset account is to store a reserve that reduces the balance in the paired account.

Related To Contra

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. Contra accounts may have a zero balance in some cases, though the actual instances of this may be rare. The allowance for doubtful accounts, for example, is zero if the company collects all of its open customer receivables or the allowance amounts were written off as a bad debt expense. Accumulated depreciation contra accounts have a balance so long as the company owns the related asset. When a company sells the asset — usually a long-term asset such as a building or vehicle — the closing entry removes the related accumulated depreciation in the contra asset account. Therefore, these accounts will have no balance to net against an asset account or report through disclosures.

The contra account definition in business accounting is an account used in the general ledger for the purpose of reducing the amount in another account related to it. A general ledger is a comprehensive list of all accounts and their connected transactions in a business. A contra account balances the numbers from two or more accounts that are compared on the balance sheet. Normal accounts on the general ledger will usually have a debit balance, while contra accounts are typically either zero or hold a negative credit balance. Accounts receivable is rarely reported on the balance sheet at its net amount.

Contra Asset Account

For accounting purposes and convenience of taxation, firms show the historical cost of accounts instead of directly showing the net value. Contra Accounts help show the net value of an account in the financial statements.

The equity section of the balance sheet is where the shareholder’s claims to assets are reported. The main contra equity account is treasury stock, which is the balance of all stock repurchased by the company. When a company repurchases shares, it increases the fractional ownership of all remaining shareholders. Instead, the existence of https://www.bookstime.com/s for companies will differ based on a company’s requirements.

What Is The Benefit Of Using A Contra Account?

Regardless of that, allowance for receivables accounts will exist for all companies that have account receivable balances. This account helps companies present a more accurate accounts receivable balance on the financial statements.

Contra Revenue Account

The “Accumulated Depreciation” line item is the contra asset account reflected on the balance sheet, but often they are combined as “PP&E, net”. 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). Contra asset accounts also help companies keep their general ledgers organized. By recording reductions in a separate account, companies can get better insights into their actual accounts.

However, there are some prevalent contra asset accounts that may exist for all companies. A company might use a combination of different types of asset accounts, and the following six types of contra asset accounts can be used in conjunction with these fixed and current asset accounts.

The accumulated depreciationaccount records the total depreciation for the years. Subtracted from the asset account, it shows you the actual book value of the asset.

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These accounts can be listed based on the respective asset, liability, or equity account to reduce their original balance. Although a bond discount is a contra liability account, it cannot be considered as a liability since no future obligation can be expected from it. The allowance for doubtful accounts is not specifically reported, but the 10 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.

Depreciation Expense Account Vs Allowance For A Depreciation Account

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. A company can choose to state this information as separate line items on its balance sheet so that any financial planners or analysts can determine the extent to which a paired asset might be reduced. In bookkeeping, asset accounts report the value of your company’s cash, equipment, raw materials and other assets. These accounts keep track of factors that reduce the worth of your assets. Contra revenue accounts show the reduced gross income because certain asset expenses give a business a net revenue outlook.

This account is paired with the fixed assets line item on the balance sheet, so that the combined total of the two accounts reveals the remaining book value of the fixed assets. What contra account is used when recording and reporting the effects of depreciation? The Accumulated Depreciation contra asset account is used for depreciation. It provides financial statement users with additional information about the relative age of the assets.

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