The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. Sales returns, sales allowance and sale discounts are different examples of contra revenue accounts. Contra accounts such as these have a debit balance and are deducted from the total amount of a company’s revenue.
Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances. 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). To account for this potential loss, BikeWorld creates a contra asset account called “Allowance for Doubtful Accounts” with a credit balance of $2,400 (4% of $60,000). On the balance sheet, the net accounts receivable will be reported as $57,600 ($60,000 – $2,400). A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet.
Contra Equity Account
This type of account could be called the allowance for doubtful accounts or bad debt reserve. The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. The amount is reported on the balance sheet in the asset section immediately below accounts receivable.
Is a contra asset a 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.
That is done by crediting accounts receivable by $100 and debiting the contra revenue account sales returns and allowances for $100. Hence, the company will have gross revenue or net sales equal to $9,900. 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. An example of a contra asset account is “Accumulated Depreciation.” It is used to record the cumulative amount of depreciation expense charged against a depreciable asset over its useful life.
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. We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R). Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting.
- The purpose of a contra asset account is to store a reserve that reduces the balance in the paired account.
- If you offer credit terms to your customers, you probably know that not all of them will pay.
- For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance.
- Contra revenue accounts typically offset revenue accounts in a firm’s income statement.
- Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a credit
- When a contra asset account is first recorded in a journal entry, the offset is to an expense.
They are useful in preserving the historical value in the main account while presenting a write-down or decrease in a separate contra account that nets to the current book value. Contra accounts serve an invaluable function in financial reporting that enhances transparency in accounting books. The amount on the equity contra account is deducted from the value of the total number of outstanding shares listed on a company’s balance sheet. You may not need to use contra asset accounts right now, but as your business grows, using contra asset accounts will likely become a necessity.
Types of Contra 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. Therefore, a contra asset can be regarded as a negative asset account. Offsetting the asset account with its respective contra asset account shows the net balance of that asset.
- The revenue contra accounts Sales Returns, Discounts and Allowances are subtracted from the main Sales Revenue account to present the net balance on a company’s income statement.
- Offsetting the asset account with its respective contra asset account shows the net balance of that asset.
- 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.
- You can estimate the total to record in the allowance for doubtful accounts based on uncollectible revenue totals from the previous year or you can conservatively estimate the amount.
- These assets will have a useful life of more than one year and will be recorded as non-current assets on the balance sheet.
As mentioned, CA accounts usually have a negative value which is the same as a credit balance. That is to completely or partially offset the balance of their related asset accounts. Asset accounts usually have a positive value which is the same as a debit balance. The contra asset account Accumulated Depreciation is deducted from the related Capital Assets to present the net balance on the parent account in a company’s balance sheet.
Free Financial Statements Cheat Sheet
Discount on Bonds Payable is a contra liability account with a debit balance that reduces the normal credit balance of its parent Bonds Payable liability account in order to present the net value of payables on a company’s balance sheet. Discount on Notes Receivable is a contra asset account with a credit balance that reduces the normal debit balance of its parent Notes Receivable asset account in order to present the net value of receivables on a company’s balance sheet. Contra liability accounts are less commonly used than contra asset accounts. Contra liability accounts are mainly used by corporations that issue bonds frequently. That is because some of the bonds are issued at a discount, so this reduces the balance of their bonds payable. 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.
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. This process continues each year until the vehicles are fully depreciated. A contra asset account is an account that is paired with and offsets the balance of a related asset account.
How Contra Asset Accounts Work
Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value. The use of contra accounts ensures the accuracy of financial accounting records, as the value of the original accounts is not directly reduced. In the event that a contra account is not utilized, it can become increasingly troublesome to determine historical costs, which makes tax preparation time-consuming and difficult. Writing off your obsolete inventory in this manner allows you to expense the cost of the obsolete inventory while also decreasing your current inventory balance using the contra asset account.
There are many situations where one account is used to offset another account. One common example is accumulated amortisation, which is a contra-asset account. This means that it acts in the opposite manner of a regular asset account. The allowance method of accounting enables a company to determine the amount reasonable to be recorded in the contra account. 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.
A company creates allowances for doubtful accounts to record the portion of accounts receivable which it believes it will no longer be able to collect. The amount in allowance for doubtful accounts is deducted from the accounts receivable account of a company. A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. Whether reported as separate lines on the financial report or as a cumulative value, the net amount of the pair of accounts is called the “net book value” of the individual asset. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting.