what is a contra asset

Although contra-asset accounts have credit balances, they do not appear in liabilities or equity. Usually, credit balances include items from one of those two natures. If you offer credit terms to your customers, you probably know that not all of them will pay. Creating this contra asset account builds https://www.quick-bookkeeping.net/journal-entries-for-inventory-transactions/ in a safeguard against overstating your accounts receivable balance. The accumulated depreciation account is perhaps the most common contra asset account used by business owners. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean.

Types of Contra Assets

A contra asset account is an asset account with a natural credit balance. This account is paired with and offsets another asset account, so that a net balance is reported on the balance sheet. As mentioned, contra asset 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.

What are the Different Types of Contra Accounts?

  1. Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets.
  2. Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount.
  3. 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.
  4. Contra liability accounts are mainly used by corporations that issue bonds frequently.

This helps the firms to evaluate the book value of their assets and liabilities. This type of reporting allows anyone analyzing the balance sheet to understand much more about the company and its assets than if they were to simply look at the net value of the depreciated asset. By reflecting both accounts on the balance sheet, analysts can understand both the original price and the total decrease in value of first in first out fifo definition a certain asset over time. Rather, it is an adjunct account or a valuation account that is added to the face value of the bonds to arrive at the carrying value (or book value) of the bonds on the balance sheet. Similarly, it allows companies to retrieve original account balances without complicated calculations. For stakeholders, looking at both accounts is also crucial in their decision-making process.

The Advantage of Using a Contra Asset Account

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. Notes receivables are promissory notes that include a promise from a borrower to repay a lender. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. The accounting entries for allowance for receivables are as follows. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.

what is a contra asset

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. Suppose a clothing business has sold $50,000 of inventory on credit.

It usually nets off against related accounts and provides an opposite effect to the balance. Therefore, contra accounts are the reverse accounts that decrease a specific account’s balance. Contra asset accounts can be used in a variety of areas, but there are three contra asset examples that you should pay close attention to. The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet.

This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders.

Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. These contra revenue accounts tend to have a debit balance and are used to calculate net sales. Contra equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which https://www.quick-bookkeeping.net/ represents the amount paid to buyback stock. Whenever the balance of a contra asset account increases (credit to the contra asset account), the increased amount is written off as an expense and is reported in the company’s income statement. Note that in accounting, the term “book value” is also used interchangeably with net value.

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. The first contra asset account is the allowance what is capex and opex for doubtful accounts. It is paired with the trade accounts receivable account, and contains a reserve for receivables that are unlikely to be paid by customers. By combining the balances in these two accounts, you can determine the net amount of receivables that the reporting entity expects to receive.