Contra asset account definition

contra asset account

The second entry will be accumulated depreciation, which will be in credit. Another question that we get is what is the relationship between a contra asset balance and the book value. Investopedia notes that the difference between the asset’s contra account balance and its account balance is called the book value. 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. Learn why contra accounts, when utilized correctly along with a paired account, are a crucial component of accurate accounting and financial review.

contra asset account

For example, contra revenue accounts can be used to track the full cost of sales less any discounts or returns. It can help businesses see the complete picture of their income and expenses. This type of is used for recording the depreciation within the timeframe of a fixed asset. Most accountants choose to record the depreciation over the useful life of an item in the accumulated depreciation contra asset account, which is a credit 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.

Allowance for doubtful accounts

A less common example of a contra asset account is Discount on Notes Receivable. The credit balance in this account is amortized or allocated to Interest Income or Interest Revenue over the life of a note receivable. This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000. A customer returned $100 worth of items, claiming them to be defective. Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks. A contra asset account is an account in the balance sheet that offsets the balance of a regular asset account.

Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value. Normal asset accounts have a debit balance, while s are in a credit balance.

A final word about contra asset accounts

It’s highly likely that your books will benefit from this process in terms of clarity, transparency, and the amount of time it takes to do accounting. 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.

  • The size of the reserve also reveals the amount of bad debt that the company expects to experience from the current set of receivables.
  • It is paired with the trade accounts receivable account, and contains a reserve for receivables that are unlikely to be paid by customers.
  • Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns.
  • The contra liability account is less common than the contra asset account.
  • A contra asset account is an account that is used to offset another fixed asset account on the balance sheet.

An example of contra equity with buying back shares or stock would be a company that has issued shares to the public. The contra equity account would be used to offset the equity account on the balance sheet. This would give a more accurate picture of the company’s equity. They are usually subcategory accounts linked to an account on the balance sheet. Contra accounts are used to offset each other and reduce the gross amount. For example, a contra accumulated depreciation account can offset a fixed asset.

Types of Contra Assets

For example, let’s say your accounts receivable balance is currently $11,500, but you’re not entirely sure that you’ll be able to collect the entire balance due. 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. The natural balance of a Best Accountants for Startups, in this case, is exactly the opposite of the balance of the related account.

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