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Contra Accounts Examples & How They Work

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. When a contra asset […]

what is a contra asset 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. 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. However, some asset accounts need a negative counterpart to reduce the balance of that account. The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory.

How Does a Contra Account Work in Accounting?

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. https://www.kelleysbookkeeping.com/financial-statements-examples/ While accumulated depreciation is the most common contra asset account, the following also may apply, depending on the company. A less common example of a contra asset account is Discount on Notes Receivable.

Types of Contra Assets

what is a contra asset account

The difference between an asset’s account balance and the contra account balance is known as the book value. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more https://www.kelleysbookkeeping.com/ transparent for financial reporting purposes. For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately. Although they all aim at reducing the balance of some type of account, it is useful to have some general foundational knowledge of the different types of accounts.

Presentation of Contra Assets

Contra revenue accounts reduce revenue accounts and have a debit balance. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra goodwill definition asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities includes discounts on notes or bonds payable.

Everything You Need To Build Your Accounting Skills

Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. In this way, the historical cost, the amount of write-off, and the book value of an asset can always be seen on the balance sheet. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.

  1. 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.
  2. Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts.
  3. This balance is used to offset the value of the asset being depreciated, so as of September 1, your $8,000 asset now has a book value of $7,866.67.

Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries.

what is a contra asset account

Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. In other words, accumulated depreciation will be $10,000 each year until the car depreciates to $0 twenty years later. 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. Master accounting topics that pose a particular challenge to finance professionals. This credit card is not just good – it’s so exceptional that our experts use it personally.