Contra Account Definition, Types, and Example
For example, a company might have a contra asset account for depreciation expense and a separate asset account for equipment cost. Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount.
- 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.
- Often when a company extends goods on credit, management expects some of those customers not to pay and so anticipates writing off bad debt.
- Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement.
- Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory.
For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets. To offset this, the allowance for doubtful accounts balance is adjusted via a credit, while the bad debt account is debited to balance out the AR account. When combined, the AR account and the allowance for doubtful accounts contra assets offer a projection of how much net cash is expected to be received from outstanding accounts. Including contra revenue accounts is important in the income statement because it shows the original amount of sales the firm has made, along with any factor that has reduced that amount. Both the asset and the corresponding contra asset accounts must be stated clearly in the balance sheet.
contra account definition
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. 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 accumulated depreciation account plays a vital role in representing the accurate value of an asset in the financial statements.
- 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.
- This account only relates to a company’s intangible assets rather than tangible.
- Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance.
- This would give a more accurate picture of the company’s assets.
Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000. A contra asset account is an account that is used to offset another Nonprofit Accounting: A Guide to Basics and Best Practices fixed asset account on the balance sheet. Contra asset accounts are typically used for accumulated depreciation, amortisation, and other accounting adjustments.
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This will repeat until the machinery has been totally depreciated, sold, or retired. The difference between an asset’s account balance and the contra account balance is known as the book value. 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. In this example, https://1investing.in/whai-is-law-firm-accounting-best-practice/ the accounts receivable is 10,000, and the allowance for doubtful debt contra account is 1,000, leaving a balance of 9,000. 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. Accumulated amortization is an account similar to accumulated depreciation.
Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement. The allowance for doubtful accounts is a contra asset because it reduces the value of the accounts receivable (AR) account on the general ledger. Often when a company extends goods on credit, management expects some of those customers not to pay and so anticipates writing off bad debt. A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger.
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The natural balance of a contra asset account, in this case, is exactly the opposite of the balance of the related account. Allowance for doubtful accounts (ADA) is a contra asset account used to create an allowance for customers who are not expected to pay the money owed for purchased goods or services. The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables. An allowance for doubtful accounts is a contra asset account that is used to offset Accounts Receivable on the balance sheet. This account is used to estimate the amount of money that is not likely to be collected from customers.
To oppose the revenue made by a company, contra revenue accounts must have a debit balance. By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount. Regardless of that, allowance for receivables accounts will exist for What is Legal Accounting Software For Lawyers all companies that have account receivable balances. This account helps companies present a more accurate accounts receivable balance on the financial statements. Accumulated depreciation is the most prevalent type of contra-asset account. It represents all the depreciation related to an asset or the company’s overall assets.
Types of Contra Assets
This type of contra asset accounts is used for recording the depreciation within the timeframe of a fixed asset. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. A debit will be made to the bad debt expense for $4,000 to balance the journal entry. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. 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. When a contra asset account is first recorded in a journal entry, the offset is to an expense.
