A Beginner’s Guide To Using Contra Asset Accounts

There is no reason for there to ever be a debit balance in a contra asset account; thus, a debit balance probably indicates an incorrect accounting entry. When a contra asset transaction is created, the offset is a charge to the income statement, which reduces profits. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation.

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. Contra RevenueContra revenue refers to any difference between a company’s gross sales and net sales due to sales returns, allowances or discount. Recording Contra Accounts 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. Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. Contra asset accounts are a type of contra account that net off against asset accounts.

Examples Of Contra Assets

For example, the allowance for doubtful accounts indicates money owed from customers a company does not expect to receive. There can be multiple reasons why the company does not expect to receive this owed money. 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. Balance Sheet AccountsA balance sheet is one of the financial statements 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.

Allowance for doubtful accounts reduce accounts receivable, while accumulated deprecation is used to reduce the value of a fixed 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. When a contra asset account is first recorded in a journal entry, the offset is to an expense.

It has extensive reporting functions, multi-user plans and an intuitive interface. Accumulated depreciation is the total amount that was depreciated for an asset up to a single point.

Declining Balance Method

Therefore, these companies must maintain an obsolete inventory reserve account to net off any unusable stock from the account. This requirement also comes from the accounting standard for inventories. We’ll do one month of your bookkeeping and prepare a set of financial statements for you to keep. Accumulated depreciation is not a current asset, as current assets aren’t depreciated because they aren’t expected to last longer than one year.

• This account helps companies present a more accurate accounts receivable balance on the financial statements.
• In other words, contra accounts are used to reduce normal accounts on the balance sheet.
• Learn about the definition, purpose, examples, and process of preparing bank reconciliations.
• 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.
• It is shown as a reduction to the asset account and is reversed when the asset is disposed of.
• The amount a company records as allowance for doubtful accounts is the amount from its accounts receivable the company considers uncollectible.

Another contra asset listed on the balance sheet is accumulated depreciation. This reduces the amount of the carrying value of a company’s fixed asset to account for the wear and tear over the asset’s useful life. Fixed assets are often listed on the balance sheet as property, plant and equipment. The accumulated depreciation account appears on the balance sheet as a credit and is a reduction from the total amount listed for fixed assets. Some companies choose not to include accumulated depreciation on the balance sheet and simply list the net amount of property, plant and equipment. Accumulated depreciation is the most prevalent type of contra asset accounts. It represents all the depreciation related to an asset or the overall assets a company owns.

Understanding Expense Accounts And How They Impact Company Finances

The financial statements are key to both financial modeling and accounting. Accumulated depreciation would be reduced from the equipment account and a net amount would be reflected in a balance sheet. Consequently, in the first year, the equipment would reflect a net value of $90,000, which is computed by deducting the accumulated depreciation from the equipment’s historical cost. Allowance for doubtful debts accounts are opposite to accounts receivable accounts. Accounts receivable are the customers to whom an organization had sold goods or provided services on credit. Thus, accounts receivable are assets generated in the ordinary course of business.

The purpose of stating accumulated depreciation on the principle balance sheet is to help the readers understand the original cost of an asset and how much of it has been written off. It may also help them in estimating the asset’s remaining useful life.

Sales Allowances-Sales allowances are also a part of the sales account. Sales allowance is the reduction in the selling price when a customer agrees to accept a defective unit instead of returning it to the seller. Is debited when a company buys back its shares from the open market. Treasury Stock AccountTreasury Stock is a stock repurchased by the issuance Company from its current shareholders that remains non-retired. Moreover, it is not considered while calculating the Company’s Earnings Per Share or dividends. Notes PayableNotes Payable is a promissory note that records the borrower’s written promise to the lender for paying up a certain amount, with interest, by a specified date. This post is to be used for informational purposes only and does not constitute legal, business, or tax advice.

What Is The Definition Of Liability?

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. Journal entries made at the end of the period for the purpose of closing temporary accounts and transferring balances to the Retained Earnings statement. Accounts payable is the amount of money owed by companies that use or buy other resources from external providers. While reporting depreciation, a company debits depreciation accounts in the general ledger and credits the cumulative depreciation account. Depreciation expenses will pass through the income statement of a specific period when the above entry was passed. Contra asset accounts are necessary for companies for various reasons.

DateParticularsDr.Cr.Depreciation$ 10,000Accumulated Depreciation$ 10,000In the above example, depreciation is an expense account. On the other hand, accumulated depreciation is a contra asset account. For example, after six years, the asset’s book value in the balance sheet will be $40,000. However, it will also have a negative accumulated depreciation of $60,000, offsetting that cost. Allowance for receivables is an account that companies maintain to record possible bad debts.

A balance sheet is a financial statement that provides an organized look at businesses’ assets in relation to the liabilities and equity. Explore the purpose of a balance sheet, its components, and presentation format, wherein both sides must be equal. Accumulated Depreciation is the total depreciation expense on a plant asset from the start of it being used in the business until the present day. Accumulated Depreciation is deducted the plant assets cost to get its book value. Definition of Prepaid Expenses In other words, prepaid expenses are costs that have been paid but are not yet used up or have not yet expired. Generally, the amount of prepaid expenses that will be used up within one year are reported on a company’s balance sheet as a current asset. 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.

List Of Contra Accounts With Examples

Now, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. The summary account in the ledger to which revenue and expense accounts are closed at the end of the period. Cash and other assets that can be converted into cash or used up within a relatively short period of time without interfering with normal business operations. The widely used approach of recognizing an equal amount of depreciation expense in each period of a depreciable asset’s useful life. A contra asset shows a zero or negative balance on your company’s balance sheet. A normal asset has a debit balance, while a contra asset sits against this to show the net balance of both assets on your financial statement. Companies may use a financial statement disclosure to identify and describe the use of a contra asset account.

To illustrate, here’s how the asset section of a balance sheet might look for the fictional company, Poochie’s Mobile Pet Grooming. You can estimate the total to record in the allowance for doubtful accounts based on uncollectible revenue totals from the previous accumulated depreciation is a contra asset account year or you can conservatively estimate the amount. An adjunct account is an account in financial reporting that increases the book value of a liability account. Subtract the asset’s salvage value from its purchase price to get the amount that can be depreciated.

Before understanding contra asset accounts, it is crucial to learn what contra accounts are. Even though they’re listed in the assets section of the balance sheet where accounts are normally positive, contra assets represent negative amounts. Examples of contra accounts include accumulated depreciation, allowance for doubtful accounts and reserve for obsolete inventory. In financial accounting, a contra asset account always relates to an asset account.

A contra liability account is a liability account that is debited in order to offset a credit to another liability account. The straight-line method is the easiest way to calculate accumulated depreciation. With the straight-line method, you depreciate assets at an equal amount over each year for the rest of its useful life.

• In the balance sheet, the accounts receivable would normal balance be reflected after adjusting this allowance contra asset account account.
• Apruve enables large enterprises to automate long-tail credit and A/R so you can stop spending 80% of your time and resources on 20% of your revenue.
• The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets.
• However, when your company sells or retires an asset, you’ll debit the accumulated depreciation account to remove the accumulated depreciation for that asset.
• Similarly, the company may choose to combine the amounts in both its contra and fixed asset accounts if the contra asset account has a relatively low balance.

Financial transactions are when the value of an asset, liability, or owner’s equity changes. Understand the types of financial transactions, and explore examples of the four main types of financial transactions.

The accumulated depreciation for an asset or group of assets increases over time as depreciation expenses are credited against the assets. In this method, bad debt expense is estimated for the period and is recorded as an expense while the allowance account is credited. Accounting utilizes journals, which are books documenting all business transactions, and also trial balance, which is a list of all business accounts. Discover what goes into these meticulous ways of keeping records and the significance of journal entries and trial balance to accurate accounting. Doube-entry accounting ensures that the total amount of debits equals the total amount of credits. Learn the basics of how this accounting system is reflected in journals and ledgers through examples, and understand the concept of normal balances.

On the balance sheet, the allowance for doubtful accounts can reduce the totals in the business’s accounts receivable. So, if the company reported receivables amounting to $100,000, the estimated 5% default rate would reduce the number of accounts receivable by $5,000. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming. They wouldn’t know any of that if you just subtracted depreciation and recorded only the asset’s net value. A contra asset account is paired with an asset and reduces its value. If your factory equipment represents a $1.7 million asset but it’s depreciated by $700,000, you’d record the depreciation in a contra asset account.

Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees. QuickBooks Online is the browser-based version of the popular desktop accounting application.

• In financial accounting, a contra asset account always relates to an asset account.
• Allowance for doubtful debt is a contra account against which bad debts are charged.
• Sometimes, the current value of a note receivable will fall compared to its face value.
• If you increase the inventory reserve during profitable periods, you can reduce it when business slows down.
• To calculate the sum of the years, you need to know the projected useful life and then add these together.

Debit depreciation expense for $16,875 and credit accumulated depreciation-equipment for $16,875. Debit accumulated depreciation -equipment for $16,875 and credit depreciation expense for $16,875. Debit depreciation expense for $18,625 and credit accumulated depreciation-equipment for $18,625. Allowance for doubtful accounts is shown as a reduction from the gross accounts receivable. The net amount of accounts receivable is presented in a balance sheet. All the accounts that the company has and lists in it’s chart of accounts are created in the general ledger. Learn more about what the general ledger and journals are, chart of accounts, trial balance and numbering accounts in the general ledger.

Author: Roman Kepczyk