What Is a Contra Asset?

The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables. For both contra asset accounts, the entry is a debit to an expense and the credit is to the contra asset account.

Above all, the contra revenue account is the one that goes in reverse. To sum up, the increase in revenue is credit, and the decrease in revenue is debit. The contra account to the accounts receivable account is the allowance for doubtful accounts and is used to represent the amount of invoiced goods or services that the business does not expect to collect. The obsolete inventory reserve account is the contra account to inventory, another asset listed on the balance sheet. Products that become unusable are recorded in this contra account to show that they are still owned by the company, but they should be excluded from the market value of inventory. Here’s a short list of some example contra asset accounts and their corresponding asset accounts. In general, accounts receivable are converted into cash within the operating cycle.

Overview: What is a contra asset account?

Contra asset accounts also provide a clear picture of the companies’ accumulation of assets. Similarly, these accounts can also be essential in various calculations. 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. However, the details for contra accounts usually exist on the notes to the financial statements. However, these can cause a reduction in other balances on the statement.

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. 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. Contra assets may be stated in separate line items on the balance sheet. Or, if they contain relatively minor balances, they may be aggregated with their paired accounts and presented as a single line item in the balance sheet. In either case, the net amount of the pair of accounts is referred to as the book value of the asset account in question.

Contra Account – Explained

Likewise, when you pay a bill, your cash account is reduced because you’re lowering the balance. 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. Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement. 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).

• For example, GAAP accounting requires fixed assets to be reported at cost on the balance sheet, but, over time, that value depreciates as the assets are used.
• This depreciation is saved in a contra asset account called accumulated depreciation.
• A contra account offsets the balance in another, related account with which it is paired.
• Examples of contra asset accounts include accumulated depreciation, obsolete inventory reserves, and allowance for doubtful accounts.

At first glance, contra accounts may seem complicated, but contra accounts exist to simplify financial statements. Contra asset accounts appear as a credit balance and reduce the value of assets.

What is Contra Revenue Account?

So, now you need to do a journal entry of sales returns in which you will reduce your sales. A contra account is used in order to better portray the relationship between certain debits and credits within the overall financial structure of an entity. A contra account can be used to remedy an error, to track depreciation of an asset, or to register payments that are not collectible. Accumulated depreciation is a contra-asset account which is subtracted from asset accounts. 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.

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. https://www.bookstime.com/s are prepared so that a specific reverse effect on the corresponding asset could be recorded. Therefore, these companies must maintain an obsolete inventory reserve account to net off any unusable stock from the account. This requirement also comes from the accounting standard for inventories.

Allowance for doubtful accounts

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. A contra liability account is the lesser known type of a contra account. The most known type of a contra asset account is the Accumulated Depreciation which reduces the amount of Fixed Assets. A contra account is an account whose balance is the opposite of a corresponding account.

On the other hand, accumulated depreciation is a Contra Asset Account. Sometimes, the current value of a note receivable will fall compared to its face value. This process will give rise to a contra asset account which is the discount on notes receivables. Contra accounts are a significant part of a company’s financial statements. These accounts can significantly reduce balances on the balance sheet.