What is a contra asset account?

what is a contra asset

When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense. Natural balance would be set off with the balance of the respective asset account. Revenue is an income statement account, but it flows through to the equity section of retained earnings as well.

The credit balance in the account Allowance for Doubtful Accounts tells us how much of the debit balance in Accounts Receivable is unlikely to be collected. Accumulated depreciation is the contra asset account used to reduce the value of a fixed asset, such as a building or machinery, over its estimated useful life. The accumulated depreciation account is used to record the amount of depreciation expense that has been charged against the asset. There are different types of Contra Accounts and the most common are contra asset, contra liability, contra equity and contra revenue accounts.

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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. A liability that is recorded as a debit balance is used to decrease the balance of a liability. Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement. Examples of revenue contra accounts are Sales Discounts, Returns and Allowances.

For example, a company has provided services to its customer for $10,000 with a sales discount of 2%. Sales Returns – Amount that is reduced from the gross revenue for goods that have been previously sold but returned to the seller. Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees. For better understanding, let me take 2 examples from above – Accumulated Amortization & Reserve/Provision for Doubtful Debts, & demonstrate the presence of the same in the extract of the balance sheet. Notes receivables are promissory notes that include a promise from a borrower to repay a lender.

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The contra asset account is used to reduce the value of the asset on the balance sheet. Accumulated Depreciation contra account contains the cumulative sum total of all the depreciation expenses that have been charged against those fixed assets over time.

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However, these can cause a reduction in other balances on the statement. Inventory obsolescence is an expense account, while the allowance for obsolete inventory is a contra asset account, which aims to reduce the inventory valuation on your balance sheet. Anytime you need to depreciate an asset, you’ll use an accumulated depreciation contra asset account, which records the amount of depreciation that has been expensed while offsetting the value of the asset being depreciated. Balance Sheet AccountsA balance sheet is one of the financial statements https://online-accounting.net/ of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company. 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.

Meaning of Contra Assets

If the example looks difficult, rest assured the solution is very simple. Because contra assets simply detract from the total value of the asset account, all one has to do is add up all the assets together first. Finally, take the total of depreciation and subtract it from total assets. If a ledger were to be observed in this situation, then one would see a balance of three asset debits matched up against three contra asset credits . Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value.

what is a contra asset

Any company that owns intangible assets such as software, patent, etc., will maintain an accumulated amortization account. Similar to depreciation, this account plays a significant role in representing the book value of a company’s assets. For example, when depreciating an asset, the accumulated depreciation account is used to reduce the book value of the asset while also keeping track of the total amount of depreciation that has been posted to date. In footnote 3, the company reports, “Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021.” Debit BalanceIn a General Ledger, when the total credit entries are less than the total number of debit entries, it refers to a debit balance.

Definition and Examples of Contra Assets

To drum up interest in the bond, the company will sell it at a discount. For example, a bond with a principal amount of $1,000 may be sold for only $950.

Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. Instead, the existence of contra asset accounts for companies will differ based on a company’s requirements. However, there are some prevalent contra asset accounts that may exist for all companies. A contra asset account is an account that opposes the balances of other asset accounts. As mentioned, a company will usually have debit balances in its asset accounts. However, the details for contra accounts usually exist on the notes to the financial statements.

How is a Contra Account Used?

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. Most accounts receivable would just be the time between purchase and credit card settlement. Buy Back Its StockShare buyback refers to the repurchase of the company’s own outstanding shares from the open market using the accumulated funds of the company to decrease the outstanding shares in the company’s balance sheet. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company. 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.

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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. 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.

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The contra asset account can also be combined with a current inventory account, allowing a financial analyst to determine the current market value of the company’s inventory. This amount is typically paired with the company’s current assets on the balance sheet. In this article, you will learn what a contra asset account is, the types of contra asset accounts a business may have as well as an example of how common types of contra asset account balances are calculated. When a company evaluates its financial what is a contra asset 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. Now, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance.

Contra accounts have different names depending on the account they correspond. For instance, a contra account that relates to an accounts receivable is called a contra asset account. The same is true for other asset accounts like accounts receivable.

So, contra assets have a credit balance, whereas assets normally have a debit balance. DateParticularsDr.Cr.Depreciation$10,000Accumulated Depreciation$10,000In the above example, depreciation is an expense account.

what is a contra asset

Contra revenue account, which is used to record the net amounts and usually has a debit balance, as opposed to the revenue account that records the gross amounts. Contra asset accounts are necessary for companies for various reasons. The most prominent of these include allowing companies to present a more accurate picture of their assets.

  • Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting.
  • Power Manufacturers, Inc. purchases new machinery for a total of $300,000.
  • 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.
  • Instead of debiting the asset account directly, the contra asset account balance will be credited separately.
  • By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes.
  • Similarly, a business may also write off these types of expenses from its financial records if the inventory has been completely phased out.

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