Contra asset definition

Posted On June 27, 2022 at 1:25 pm by / No Comments

what is a contra asset

Because contra means “against,” one could quickly conclude that a contra asset account is going to be an account that goes against the regular asset account on the Balance Sheet. Quite frankly, the actual definition is not far from this estimate. In a sense, a contra asset account is a negative asset account that detracts from all of the other assets included in the balance sheet. More specifically, record the contra asset as a credit that is supposed to balance out a correlating plant asset. The situations that contra asset accounts appear are the ones dealing with Depreciation, which will be explored below. In essence, contra asset accounts have a negative balance while other asset accounts have a positive balance.

How Are Accumulated Depreciation and Depreciation Expense Related? – Investopedia

How Are Accumulated Depreciation and Depreciation Expense Related?.

Posted: Sat, 09 Apr 2022 07:00:00 GMT [source]

Accumulated deprecation represents the cumulative amount of depreciation expense charged against an asset. There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra liabilities reduce liability accounts and carry a debit balance. Contra equity accounts carry a debit balance reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance.

Accounting Topics

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.

  • Contra equity accounts carry a debit balance reduce equity accounts.
  • A contra equity account reduces the total number of outstanding shares listed on a company’s balance sheet.
  • This process will give rise to a contra asset account which is the discount on notes receivables.
  • Perhaps the most common example of a contra account is an asset’s depreciation, which is subtracted from its original price to calculate its book value.
  • A general ledger is a record-keeping system for a company’s financial data, with debit and credit account records validated by a trial balance.
  • Contra asset accounts include allowance for doubtful accounts and accumulated depreciation.

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An example of recording a contra asset

The purpose of a contra asset account is to store a reserve that reduces the balance in the paired account. 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. For example, two firms may have contra accounts in which each owes the other money.

what is a contra asset

Free Cash Flow The money left over after a company supports operations can be a snapshot of its financial health. Contra accounts are confusing at first, but, with a little study, understanding them becomes second nature.

Contra Asset: Definition, Meaning, Types, Examples

Both of these accounts offset each other to represent a net balance on a company’s balance sheet. Even though a contra asset account shows negative or zero balances in credits within the account, it can still be advantageous for businesses to show any contra asset accounts they currently have within their balance sheets.

  • In other words, contra accounts are used to reduce normal accounts on the balance sheet.
  • Reducing or offsetting the gross value of an asset with the corresponding contra asset will give us the net value of the asset.
  • Transactions made to contra accounts are presented on a company’s financial statements under the related account.
  • The account Allowance for Doubtful Account is credited when the account Bad Debts Expense is debited under the allowance method.

The following are several key reasons why it can be important to include contra asset accounts on a balance sheet. Most accountants choose to record the depreciation over the useful life of an item in the accumulated depreciation contra asset account, which is a credit account. 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. In order to balance the journal entry, a debit will be made to the bad debt expense for $4,000. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. Taking into account the list of contra asset accounts, how would you calculate the net value of assets?

Types of contra accounts

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. When a contra asset account is not stated what is a contra asset separately in the balance sheet, it may be worthwhile to disclose the amount in the accompanying footnotes, where readers can readily see it. For businesses, the most common type of contra asset is the allowance for doubtful accounts, which is used to offset accounts receivable on the balance sheet. When a customer owes a business some money, the business records an account receivable.

  • 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.
  • If you depreciated it evenly you would take $20,000, divide it by 5 and expense $4,000 each year.
  • The lender may offer the company a discount if it repays the note early.
  • Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available.
  • Because of the oppositional nature of these asset accounts, the contra account acts as a ‘contrary’ element to the debit balances of regular asset accounts.
  • For example, let’s say your accounts receivable balance is currently $11,500, but you’re not entirely sure that you’ll be able to collect the entire balance due.

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.

How is a Contra Account Used?

The bond is listed on the balance sheet at the full amount of $1,000, but the cash received is just $950, so a contra liability for the discount is listed to make the entry balance. Contra EquityAn example of a contra equity account would be treasury stock, the amount paid to repurchase previous issuances of stock, which reduces shareholders equity and the total number of shares outstanding. Now let us say that Power Manufacturers, Inc. reports its total credit sales for the quarter at $100,000, and it additionally estimates that 5% of all the credit sales made in the past quarter will default on payment. On the balance sheet, the allowance for doubtful accounts can reduce the totals in the business’s accounts receivable.

Is a contra asset an asset or liability?

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.

Still, it is important when possible to consider how the net accounts are calculated and be wary of companies that are reporting a ton of bad debts. The contra revenue account is a reduction from gross revenue, which results in net revenue. These transactions are reported in one or more contra revenue accounts, which usually have a debit balance and reduce the total amount of the company’s net revenue. 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. This type of account can equalize balances in the asset account that it is paired with on a business’s balance sheet.

Example accumulated depreciation

Accounts receivable is rarely reported on the balance sheet at its net amount. Instead, it is reported at its full amount with an allowance for bad debts listed below it. Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off. For most companies, the contra asset accounts will also include several types. Before understanding contra asset accounts, it is crucial to learn what contra accounts are.

The transactions made in this account are reported on a company’s financial statements directly under the related 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”. For example, accumulated depreciation is a contra-asset that reduces the value of a company’s fixed assets, resulting in net assets. 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). A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger. 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.

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