Contra Account Definition + Journal Entry Examples

There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra liabilities reduce liability accounts and carry a debit balance. Contra equity accounts carry a debit balance and reduce equity accounts.

What is a Contra Asset?

So as values shift depending on real-world factors, rather than making deductions or adjustments to the original or “parent” account, you would record these changes in the contra account instead. By viewing these accounts — the parent and contra — in tandem, business owners can gain broader insights, preserve the historical figures stored in the parent account, and make accommodations for any relevant changes. Each account in a general ledger will be designated debit or credit accounts depending on whether they’re categorized as assets, liabilities, revenues or expenses. If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative.

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Accumulated depreciation is the total of all depreciation that has been charged to existing fixed assets such as equipment and buildings. There can be hidden value in stocks that have a lot of fully depreciated buildings. Companies like to depreciate assets as quickly as possible to get the tax savings, so the balance sheet may not state the true value of fixed assets. Instead, the existence of contra-asset accounts for companies will differ based on a company’s requirements.

Contra accounts are worth a look

The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. Contra liability, equity, and revenue accounts https://home-improvement-ideas.net/page/2/ have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances.

Contra Account: Explained

This account only relates to a company’s intangible assets rather than tangible. If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts. For example, when depreciating an asset, the accumulated depreciation account is used to reduce the book value of the asset while also keeping track of the total amount of depreciation that has been posted to date. The difference between an asset’s account balance and the contra account balance is known as the book value. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account. The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold.

Understanding Contra in Accounting: Definition, Examples, and Applications

• 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.
• After each accounting period, the company records a depreciation expense of the asset.
• Asset accounts always maintain a debit balance, so anytime that you increase the value of an asset, such as when you deposit customer payments or invoice a customer, that asset account is debited or increased.
• An asset account which is expected to have a credit balance (which is contrary to the normal debit balance of an asset account).
• Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.
• As mentioned, there can be a contra account for any type of transaction depending on a company’s needs.

The main advantage of using a contra asset account is to separate this reduction from the asset account with which it is paired. By doing so, you can more clearly see the total amount of the related asset account, which would otherwise have been obscured by the offsetting amount of the reserve. A less common example of a contra asset account is Discount on Notes Receivable.

What are the Benefits of Factoring Your Account Receivable?

The amount is reported on the balance sheet in the asset section immediately below accounts receivable. 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 https://www.kinodrive.com/celebrity/chris-casper-kelly-61140/ 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. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory.

• 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.
• Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts.
• If every single buyer had taken advantage of the early payment discount, the company would have provided roughly $10 thousand in discounts during that same timeframe.
• There can be hidden value in stocks that have a lot of fully depreciated buildings.
• If a company has a high or fast-growing allowance as a percentage of accounts receivable, keep a close eye on it.

However, the “Allowance for Doubtful Accounts” (or “Allowance for Uncollectible Accounts”) is a contra account related to the concept of bad debts. This contra-asset account reduces the accounts receivable balance on the balance sheet to its net realizable value. The Allowance for Doubtful Accounts carries a credit http://niiit.ru/Ofisy-arenda-kuplya/piter-kommercheskiy-centr.html balance that reduces the total amount of accounts receivable to show the amount that the company expects to collect. 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.