Contra Asset Account Definition, Examples, List of Accounts

A contra liability account is not classified as a liability, since it does not represent a future obligation. Equity recorded as a debit balance is used to decrease the balance of a standard equity account. It is a reduction from equity because it represents the amount paid by a corporation to buy back its stock. The contra account accounting reduces the total number of outstanding shares.

Allowance for Receivables

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. Asset accounts always maintain a debit balance, so anytime that you increase the value of an asset, such as when you deposit customer payments or invoice a customer, that asset account is debited or increased. Likewise, when you pay a bill, your cash account is reduced because you’re lowering the balance. 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 reality, the actual number of company discounts came closer to $5 thousand.
• Companies may use a financial statement disclosure to identify and describe the use of a contra asset account.
• Contra accounts are a significant part of a company’s financial statements.
• Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc.

Companies may use a financial statement disclosure to identify and describe the use of a contra asset account. 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. This depreciation is saved in a contra asset account called accumulated depreciation. The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment.

#2 – Contra Liability

Allowance for doubtful accounts (ADA) is a contra asset account used to create an allowance for customers who are not expected to pay the money owed for purchased goods or services. The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables. The Notes Receivable account documents the total value of any promissory notes held by the company. Typically, these notes reflect purchases made on credit by your customers. To obtain a cash payout before the note reaches maturity, you can sell these notes to a bank or other financial institution for some price below the note’s face value. A contra revenue represents any deductions or offsets that need to be removed from gross revenue to provide a clearer understanding of actual income  —  such as in the example just provided.

Presentation of Contra Assets

When looking at the balance sheet, it is essential to understand what is being shown on the two sides – the assets debit balance and the liabilities credit balance. The assets are always shown on the left-hand side, and the liabilities are always displayed on the right-hand side. As mentioned, companies do not represent these accounts on the balance sheet.

Why are Contra Accounts Inportant?

A contra account is an asset account that is kept at either a negative or zero balance and is used on a balance sheet to offset the positive balance of a paired asset. To put it another way, a contra account is an account listed within a general ledger with the purpose of capturing the reduced value of a paired or related account when the two are added together. In addition, year-end accounts receivable total $100,000 but have an anticipated net realizable value of only $93,000. Neither the $7,000 nor the $93,000 figure is expected to be exact but the eventual amounts should not be materially different. This basic portrait provides decision makers with fairly presented information about the accounts receivables held by the reporting company. Before the advent of computerised accounting, manual accounting procedure used a ledger book for each T-account.

For example, when your company borrows money, you would identify that debt in a Notes Payable account. Furthermore, if you subsequently pay off that debt early and capture a discount, the contra liability account — Discount Notes Payable — would record those savings. Another common contra liability account is a Discount on Bonds Payable account used by businesses that issue their own bonds. The contra liability account is less common than the contra asset account. An example of a contra liability account is the bond discount account, which offsets the bond payable account.

Totaling of all contra asset definition debits and credits in the general ledger at the end of a financial period is known as trial balance. The main advantage of using a contra asset account is to separate this reduction from the asset account with which it is paired. By doing so, you can more clearly see the total amount of the related asset account, which would otherwise have been obscured by the offsetting amount of the reserve.

To convert your invoice management efforts to an electronic format that can easily share data with other financial systems, businesses can leverage Invoiced’s E-invoice Network. At the same time, our Accounts Receivable Automation software and Accounts Payable Automation software makes tracking, managing, and processing crucial assets and liabilities — and their contras — easier than ever before. In its general ledger, the business will want to capture its gross sales figures and the actual value of the discount. The proper size of a contra asset account can be the subject of considerable discussion between a company controller and the company’s auditors. The auditors want to ensure that reserves are adequate, while the controller is more inclined to keep reserves low in order to increase the reported profit level. Business Checking Accounts Business checking accounts are an essential tool for managing company funds, but finding the right one can be a little daunting, especially with new options cropping up all the time.

However, these vehicles have experienced significant wear and tear in the intervening years. And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand. For industries that rely on natural resources — mining, logging, oil, gas — depletion tracks the gradual exhaustion of the raw material in question, offsetting that loss in value against the initial appraisal of the land. So an Accumulated Depletion account would serve as the contra for the parent Fixed Asset account. A debit to one account can be balanced by more than one credit to other accounts, and vice versa. For all transactions, the total debits must be equal to the total credits and therefore balance.

This is the reason they are categorized as a contra account as the normal asset accounts have positive or debit balance. These contra assets in the balance sheet are reflected with the asset accounts they are paired with to equalize the balance. Put simply, contra accounts are used to reduce the normal accounts on the balance sheet.

Contra asset accounts help companies record any reductions to their non-current and current assets. By doing so, they can bring their asset accounts to a more accurate position. 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.

• Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt.
• The most common contra type, contra assets, records the loss in value of any asset accounts listed in your general ledger.
• So, in this case, accumulated depreciation is a contra asset account related to plant & equipment.
• The amount of this reserve is typically based on the company’s historical loss experience for each reserve.
• A contra account carries a balance that is opposite to the normal balance of its related main account.

Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset. Accountants place it on the balance sheet summary directly below the asset it reduces and directly above the net asset value. Usage Accountants use a contra asset account to track reductions to an asset separately from the asset itself. The resulting benefit is that the balance sheet summary shows the original value of the asset, the amount by which the asset has been reduced and the asset’s net value. Examples Two common contra asset accounts are accumulated depreciation and allowance for doubtful accounts. A regular asset account typically carries a debit balance, so a contra asset account carries a credit balance.

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