contra asset account

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. Asset accounts usually have a positive value which is the same as a debit balance.

contra asset account

A bit more work will be required on the accountant’s or account analyst’s behalf if books are done manually without any software. The company’s https://intuit-payroll.org/the-founders-guide-to-startup-accounting/ will record unusable or obsolete assets. Assets can become obsolete or unusable for a variety of reasons, such as getting sold or retired because of wear or inefficiency. And it’s particularly important to track and manage these assets. Obsolete inventory accounts are very important in dealing with this, especially when many smaller businesses struggle with obsolete assets regularly.

Contra Account

This would let users of the financial statements calculate the book value of the liability. In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000. If the asset account had a credit balance or the contra asset account had a debit balance, this would indicate an error in the journal entries. Note that in accounting, the term “book value” is also used interchangeably with net value. In an accounting system, ledger accounts are designed to contain only similar transactions and/or balances. A separate account is needed whenever the nature of transactions changes.

  • Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks.
  • Obsolete inventory or obsolete inventory reserves is another popular type of contra asset accounts.
  • Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset.
  • The accumulated depreciation account plays a vital role in representing the accurate value of an asset in the financial statements.
  • In either case, using these accounts can help you better manage depreciation expense, keep your accounts receivable balance accurate, and properly dispose of and account for obsolete inventory.

This allows the financial analyst to evaluate the company inventory’s current market value. 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. When researching companies, the financial statement is a great place to start. Contra accounts are confusing at first, but, with a little study, understanding them becomes second nature. Let’s go over how they work and what the main types are, and then finish with an example.

Example of a Contra Account

At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset. For example, if the balance of accumulated depreciation increases from $20,000 to $50,000, this means that the depreciation expense amounts to $30,000, which will be listed in the income statement. The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean.

contra asset account

Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets. In case the contra asset account is not listed in the balance sheet, it must be listed in the footnotes of the financial statement for the users to be informed. The equity section of the balance sheet is where the shareholder’s claims to assets are reported. The main contra equity account is treasury stock, which is the balance of all stock repurchased by the company.

Examples of Contra Asset Accounts

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. The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation.

  • These contras reduce the equity account and carry a debit balance.
  • 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.
  • This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000.
  • In response, the firm should decrease its accounts receivable and revenue balances.
  • Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers.

Sometimes, it is important to keep the original balance of the accounts and create the contra accounts to be able to calculate the net value of the account. 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. The difference between an asset’s account balance https://www.wave-accounting.net/accounting-for-in-kind-donations-to-nonprofits/ 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 transparent for financial reporting purposes.

Contra assets

These contra revenue accounts tend to have a debit balance and are used to calculate net sales. A contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as Bookkeeping for Nonprofits: Best Practices, Tips, Resources, FAQss. It is not classified as a liability since it does not represent a future obligation. Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value. For example, GAAP accounting (or generally accepted accounting principles) requires fixed assets to be reported at cost on the balance sheet, but, over time, that value depreciates as the assets are used.