contra asset account

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 either case, the net amount of the pair of accounts is referred to as the book value of the asset account in question. When a contra asset account is not stated separately in the balance sheet, it may be worthwhile to disclose the amount in the accompanying footnotes, where readers can readily see it. An asset account which is expected to have a credit balance (which is contrary to the normal debit balance of an asset account). For example, the contra asset account Allowance for Doubtful Accounts is related to Accounts Receivable.

Contra equity accounts are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds. Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances. 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 https://1investing.in/the-industry-s-1-legal-software-for-law-firms-try/ determine the net 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.

Examples of Contra Asset Accounts

Instead of debiting the asset account directly, the contra asset account balance will be credited (reduced) separately. Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable. They are used in case some customers won’t be able to pay the money they owe to the business. As mentioned, contra asset accounts are usually listed below their matching asset accounts, and the net values of those assets are written next to the contra accounts. In response, the firm should decrease its accounts receivable and revenue balances. That is done by crediting accounts receivable by $100 and debiting the contra revenue account sales returns and allowances for $100.

Therefore, a contra asset can be regarded as a negative asset account. Offsetting the asset account with its respective Bookkeeping for Solo and Small Law Firms shows the net balance of that asset. Contra accounts play an important role in accounting by helping businesses track certain aspects of their finances more accurately.

How to Use Contra Asset Accounts

Therefore, for these three, the debit balance actually represents a negative amount. Contra asset accounts are hugely beneficial for nearly all types of companies. A contra asset account example is an accumulated depreciation account that will help the company track and offset fixed assets. Contra asset accounts are useful tools in double-entry accounting. They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting. For instance, it is common to keep the purchase price of a piece of equipment as a historical cost in the debit asset account when it comes to fixed assets.

Whenever the balance of an account needs to be reduced in a company’s ledger, it is not always applicable to credit the account if it is an asset or debit the account if it is a liability. Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts. This Law Firm Accounting and Bookkeeping: Tips and Best Practices helps the firms to evaluate the book value of their assets and liabilities. ABC Computers makes sales of 90,000; unfortunately, due to a fault in a product, they received returns of 2,500. The sales will still show a sales credit on the profit and loss of 90,000, but there is also a contra returns account with a debit of 2,500.

Obsolete Inventory

This would allow the company to track the amount of money that has been borrowed. The contra liability account would be used to offset the liability account on the balance sheet. The company estimates that it will not be able to collect 1,000 from its customers. The allowance for doubtful accounts is a contra asset account that is used to offset Accounts Receivable on the balance sheet. Contra asset accounts provide business owners with the true value of certain asset accounts.

  • Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement.
  • When a contra asset account is not stated separately in the balance sheet, it may be worthwhile to disclose the amount in the accompanying footnotes, where readers can readily see it.
  • When a contra asset transaction is created, the offset is a charge to the income statement, which reduces profits.
  • Contra assets may be stated in separate line items on the balance sheet.
  • The credit balance in this account is amortized or allocated to Interest Income or Interest Revenue over the life of a note receivable.
  • This allows the financial analyst to evaluate the company inventory’s current market value.