Contra accounts definition

Such accounts are allowance for doubtful accounts and the accumulated depreciation account. 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. Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance.

Far less common is the obsolete inventory reserve, which reduces the overall inventory value on the balance sheet. 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. In bookkeeping, a contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit (negative) balance.

Depreciation Expense Account Vs. Allowance for a Depreciation Account

This discount is subtracted from the total amount borrowed to better reflect the discount given by the lender. For example, a building is acquired for $20,000, that $20,000 is recorded on the general ledger while the depreciation of the building is recorded separately. When researching companies, the financial statement is a great place to start. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. The auditors aim to keep the balances at their adequate levels, but the controller might want to keep them as low as possible to reduce expenses and maximize profit levels. Emilie is a Certified Accountant and Banker with Master’s in Business and 15 years of experience in finance and accounting from corporates, financial services firms – and fast growing start-ups.

The deprecation expense, however, for a piece of equipment is only recognized for its useful life. Even though the equipment may still be in use beyond its useful life, no more depreciation is recorded on the financial statements. Contra asset accounts appear as separate line items on the balance sheet. They are also accessible via the general ledger, what are the advantages and disadvantages of process costing trial balance, and some cash flow statements. Contra accounts with small balances may not appear separately, but may be combined with the asset account, subtracting the contra balance from the asset balance. Contra accounts that are combined into the asset value and not shown as separate line items are noted in the footnotes of the balance sheet.

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Allowance for doubtful accounts reduce accounts receivable, while accumulated deprecation is used to reduce the value of a fixed asset. A contra liability is an account in which activity is recorded as a debit balance is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as contra asset accounts. It is not classified as a liability since it does not represent a future obligation. Accumulated depreciation as a contra asset account will definitely evolve as long-term fixed assets depreciate in value. The company, therefore, records these changes on their balance sheet as the changes are likely to reduce the company’s gross fixed assets.

These accounts are maintained individually and are adjusted from the corresponding asset’s balance to show the net amount of the assets in financial statements. This process continues each year until the vehicles are fully depreciated. To account for this potential loss, GreenThumb creates a contra asset account called “Allowance for Doubtful Accounts” with a credit balance of $1,200 (3% of $40,000). On the balance sheet, the net accounts receivable will be reported as $38,800 ($40,000 – $1,200). The amount for estimated uncollectible accounts is a bad debt operating expense.

The Financial Fix

For instance, it is common to keep the purchase price of a piece of equipment as a historical cost in the debit asset account when it comes to fixed assets. 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. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation.

Contra liabilities are common in companies that sell bonds to raise capital. 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. 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.

Discount on Notes Receivable

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 (van, building, equipment) matched up against three contra asset credits (van, building, equipment).

A contra asset account is an account that is paired with and offsets the balance of a related asset account. It carries a credit balance, which is the opposite of the normal debit balance of asset accounts. The purpose of a contra asset account is to track and report reductions in the value of the related asset. Contra accounts appear on the same financial statement as the related account. For example, an accounts receivable’s contra account is a contra asset account.