What is a contra asset account?

Credit BalanceCredit Balance is the capital amount that a company owes to its customers & it is reflected on the right side of the General Ledger Account. Usually, Liability accounts, Revenue accounts, Equity Accounts, Contra-Expense & Contra-Asset accounts tend to have the credit balance. 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. They are categorized as current assets on the balance sheet as the payments expected within a year. This account is not classified as an asset since it does not represent a long-term value. It is not classified as a liability since it does not constitute a future obligation. Contra assets allow for more granular visibility on the balance sheet by maintaining historical costs and independent values rather than reducing the original account directly.

• When reporting a contra account in a company’s financial statement, it is reported immediately below the account it relates to or corresponds.
• That is to completely or partially offset the balance of their related asset accounts.
• Therefore, a contra asset can be regarded as a negative asset account.
• The reason that a ledger account is often referred to as a T-account is due to the way the account is physically drawn on paper (representing a “T”).
• Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year.
• A contra equity account reduces the total number of outstanding shares listed on a company’s balance sheet.

Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Therefore, a contra asset can be regarded as a negative asset account. Offsetting the asset account with its respective contra asset account shows the net balance of that asset. The complete accounting equation based on the modern approach is very easy to remember if you focus on Assets, Expenses, Costs, Dividends . All those account types increase with debits or left side entries. Conversely, a decrease to any of those accounts is a credit or right side entry. On the other hand, increases in revenue, liability or equity accounts are credits or right side entries, and decreases are left side entries or debits.

Contra liability account

A contra account is a negative account that is netted from the balance of another account on the balance sheet. Similarly, its underlying balances also appear on the credit side of the trial balance. However, a contra equity account is a debit balance that reduces the balances reported on equity accounts. For example, treasury stock is a common type of contra equity account. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value.

Contra accounts are also helpful in recording temporary reductions in the original balances. For example, treasury stock for equity may last for a short time. Therefore, having them separate can ensure companies can track these https://www.wave-accounting.net/ changes easily. Contra accounts also allow companies to present the net value for these areas by reducing the original amount. A contra account is an account with a balance opposite the normal accounts in its category.

What Does Contra Account Mean?

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. Allowance for doubtful accounts is netted from the accounts receivable balance. The company predicts which accounts receivable won’t be paid by customers and writes those off. When the account receivable is written off, it is added to bad debt expense on the income statement and placed in the contra account.

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.

What Is the Journal Entry if a Company Pays Dividends With Cash?

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Contra LiabilityFinancing fees in M&A are an example of a contra liability, as the fees are amortized over the debt’s maturity – which in turn reduces the tax burden until the end of the term. A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment.

• These are transactions that are recorded between cash and bank accounts.
• Contra asset accounts have a balance that is opposite from the regular asset accounts.
• The purpose of a contra asset account is to store a reserve that reduces the balance in the paired account.
• The allowance for doubtful accounts is not specifically reported, but the 10 reported that the allowance is immaterial to the amount.
• The complete accounting equation based on the modern approach is very easy to remember if you focus on Assets, Expenses, Costs, Dividends .

Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. It is a general ledger account to have its balance be the opposite of the original balance for that account. It is linked to specific accounts and is reported as reductions from these accounts.

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That is done by crediting accounts receivable by $100 and debiting the contra revenue account sales returns and allowances for $100. Hence, the company will have gross revenue or net sales equal to $9,900. To oppose the revenue made by a company, contra revenue accounts must have a debit balance. Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks. Contra accounts reduce the balance on a paired account in a specific area in the balance sheet. However, these accounts do not appear on the financial statement separately.

These items decrease the liability balance on the paired liability account. For example, a discount on bonds is a type of contra liability account. This account reduces the balance reported for bonds on the balance sheet. Expense accounts are technically contra equity accounts because they are linked to another equity account, revenue, and maintain an opposite balance. Regular equity accounts, like revenue, maintain a credit balance. The expense account uses its debit balance to reduce the revenue account’s credit balance. The contra revenue accounts commonly used in small-business accounting include sales returns, sales allowance and sale discounts.