Contra Asset Account Definition

Accounts receivable is the main account with a debit normal balance and provision for doubtful debts is an account with credit normal balance which offsets the main account. The contra asset account carries a credit balance because an asset account usually has a debit balance. Such accounts are allowance for doubtful accounts and the accumulated depreciation account. Contra asset accounts are a type of contra account that net off against asset accounts. These include accumulated depreciation, accumulated amortization, allowance for receivables, obsolete inventory, and discount on notes receivables. Allowance for receivables is an account that companies maintain to record possible bad debts. Regardless of that, allowance for receivables accounts will exist for all companies that have account receivable balances.

When a contra asset transaction is created, the offset is a charge to the income statement, which reduces profits. 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. A liability that 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.

Is Accumulated Depreciation A Current Asset?

These billings may usually be documented on invoices, which are then summarized in an aging report for all the business’s accounts receivable. The difference between an asset’s account balance and the contra account balance is known as the book value. Or the allowance for uncollectible accounts) reflects the estimated amount that will eventually have to be written off as uncollectible. Understand the reason for reporting a separate allowance account in connection with accounts receivable.

Most financial disclosures dictate the amount expected to be lost, how the company came up with the figure, and any financial impact this lost capital will have on the business. A separate disclosure paragraph is often necessary for each contra account. If you depreciated it evenly you would take $20,000, divide it by 5 and expense $4,000 each year. On the balance sheet you would list the asset at $20,000 then show the $4,000 in accumulated depreciation being subtracted from it for a net value of $16,000.

Types Of Contra Account

Contra revenue accounts reduce revenue accounts and have a debit balance. Osmand Vitez A contra asset is an account that carries a natural credit balance even though most assets have a normal debit balance. A contra asset is an account that carries contra asset on balance sheet a natural credit balance even though most assets have a normal debit balance. Assets represent items a company owns and uses during business operations, such as cash, inventory, and prepaid expenses along with buildings, vehicles, and land.

Contra RevenueContra revenue refers to any difference between a company’s gross sales and net sales due to sales returns, allowances or discount. Revenue is an income statement account, but it flows through to the equity section of retained earnings as well.

List Of Contra Accounts

Liability accounts record debts or future obligations a business or entity owes to others. When one institution borrows from another for a period of time, the ledger of the borrowing institution categorises the argument under liability accounts. AssetDebits Credits XThe “X” in the debit column denotes the increasing effect of a transaction on the asset account balance , because a debit to an asset account is an increase. The asset account above has been added to by a debit value X, i.e. the balance has increased by £X or $X. Likewise, in the liability account below, the X in the credit column denotes the increasing effect on the liability account balance , because a credit to a liability account is an increase. “Daybooks” or journals are used to list every single transaction that took place during the day, and the list is totalled at the end of the day.

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. A debit balance is a net amount often calculated as debit minus credit in the General Ledger after recording every transaction. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company. Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers.

What Is A Contra Asset Account? The Balance Of Contra Asset

These are all examples of contra asset accounts, which are the prevalent type of contra accounts. The above accounts are the standard items that a company’s financial statements will include. However, there are other items as well that may not show in those financial statements. For most companies, the contra asset accounts will include several types as well. Before understanding contra asset accounts, it is crucial to learn what contra accounts are. Contra assets and contra liabilities are listed on a company’s balance sheet and carry balances opposite of their related accounts. Unlike regular assets and liabilities, contra assets typically keep a credit balance and contra liabilities typically keep a debit balance.

These go against the normal asset accounts, which have a debit balance. In essence, contra asset accounts have a negative balance while other asset accounts have a positive balance.

Contra Equity And Contra Revenue

The accumulated depreciation amount shows how much depreciation expense has been charged against an asset. Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value. Here’s a short list of some example contra asset accounts and their corresponding asset accounts.

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. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance. As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find. Companies bury them in the footnotes and often don’t break out the actual calculation.

These are physically extracted and only replaced by a natural process. Accumulated depletion accounts for the reduction of value in a natural resource. For example, as a company extracts oil from an oil well over a period of time, the value of the oil well declines.

All three values can be useful for investors depending on what they’re looking for. The following are several key reasons why it can be important to include contra asset accounts on a balance sheet. The income statement depreciation expense is the amount of depreciation expensed for the period indicated on the income statement. 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 balance. Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. A Contra account is an account that appears as a subtraction from another account on balance sheet of a company. For example, provision for bad debts is a contra account of accounts receivable.

This method is used in the United Kingdom, where it is simply known as the Traditional approach. On the other hand, when a utility customer pays a bill or the utility corrects an overcharge, the customer’s account is credited. This is because the customer’s account is one of the utility’s accounts receivable, which are Assets to the utility because they represent money the utility can expect to receive from the customer in the future.

• An allowance for doubtful accounts is a contra-asset account that reduces the total receivables reported to reflect only the amounts expected to be paid.
• The accumulated depreciation account appears on the balance sheet as a credit and is a reduction from the total amount listed for fixed assets.
• The necessary reduction is then recorded by means of an adjusting entry.
• If the company repays the loan early, the lender may provide a discount.
• Credit a contra-account “Allowance for Bad Debts” on the Balance Sheet.
• 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.

If you write a check for more than is in your bank account you are going to going to go from a debit balance to a credit balance. You could do that by miscalculating how much money is in your account or putting money into or taking money out of the wrong bank account by accident. The total decrease in the value of an asset on the balance sheet over time is accumulated depreciation. The values of all assets of any type are put together on a balance sheet rather than each individual asset being recorded. 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.

The two most common contra accounts are the allowance for doubtful accounts/bad debt reserve, which is subtracted from accounts receivable, and accumulated depreciation, which is subtracted from fixed assets. To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts. Since it is a contra asset account, this allowance account must have a credit balance . The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable.

A bond discount is an example of a contra liability account and it reduces the amount of a bond payable. Therefore, a contra asset account is credited in order to reduce the amount of the asset. An example of a contra account is Accumulated Depreciation which is a contra asset account. When the normal balance of an asset is a debit, a contra account’s normal balance would be a credit, and when a liability’s normal balance is a credit, the contra account is a debit.

• Contra accounts may have a zero balance in some cases, though the actual instances of this may be rare.
• Contra accounts can get buried in the footnotes of financial statements, but they could be a key piece of your investigation into a growth stock’s prospects.
• The Johnson family is expecting visitors for the holidays and will need to furnish the spare bedroom.
• Contra asset accounts are necessary for companies for various reasons.
• Debit cards and credit cards are creative terms used by the banking industry to market and identify each card.
• Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares.
• If the credit is due to a bill payment, then the utility will add the money to its own cash account, which is a debit because the account is another Asset.

Debits and credits are traditionally distinguished by writing the transfer amounts in separate columns of an account book. Alternately, they can be listed in one column, indicating debits with the suffix “Dr” or writing them plain, and indicating credits with the suffix “Cr” or a minus sign. Despite the use of a minus sign, debits and credits do not correspond directly to positive and negative numbers. When the total of debits in an account exceeds the total of credits, the account is said to have a net debit balance equal to the difference; when the opposite is true, it has a net credit balance. For a particular account, one of these will be the normal balance type and will be reported as a positive number, while a negative balance will indicate an abnormal situation, as when a bank account is overdrawn. Debit balances are normal for asset and expense accounts, and credit balances are normal for liability, equity and revenue accounts. In an accounting system, ledger accounts are designed to contain similar classes of transactions.

Accumulated depreciation is an asset account with a credit balance known as a long-term contra asset account that is reported on the balance sheet under the heading Property, Plant and Equipment. The amount of a long-term asset’s cost that has been allocated, since the time that the asset was acquired. A contra asset account is an account that opposes the balances of other asset accounts.