Contra Account Definition + Journal Entry Examples

A contra account is a general ledger account with a balance that is the opposite of another, related account that it is paired with. The asset’s balance is reduced by the impairment amount to reflect the asset’s new economic value and the account remains on the balance sheet. Unlike a regular disposal of an asset, where the asset is abandoned and written off the accounting records, an asset disposal sale involves a receipt of cash or other proceeds.

A regular asset account typically carries a debit balance, so a contra asset account carries a credit balance. Two common contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts represents the percentage of accounts receivable a company believes it cannot collect. Allowance for doubtful accounts offsets a company’s accounts receivable account. Accumulated depreciation offsets a company’s real property assets, such as buildings, equipment and machinery.

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Discount On Bonds PayableDiscount on bonds payable is the markdown value of a bond’s coupon rate or selling price compared to its market interest rate or fair value. Such bonds trade at a lower price than their face value. Need a robust accounting system; else, operational difficulties may arise. Are prepared for various parties; some of them might not be accounting versed; they help identify the reduction in total value. Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years.

This type is paired with the asset account, which allows a business to record the original price or value of the asset at time of purchase. The contra asset account then allows recording of the value factoring in depreciation. The use of contra accounts ensures the accuracy of financial accounting records, as the value of the original accounts is not directly reduced.

In this way, the historical cost, the amount of write-off, and the book value of an asset can always be seen on the balance sheet. Which one of the following accounts will not appear in a balance sheet? Which of the following asset accounts is increased when a receivable is collected? Learn the definition of fixed assets and examine their importance. Explore the various types of fixed assets, identify their characteristics, and see examples. Contra accounts are used to help a company report the original amount of a transaction as well as reductions that may have happened.

Overview: What is a contra asset account?

The proceeds from the sale will increase cash or other asset account. In accounting, intangible assets are defined as non-monetary assets that cannot be seen, touched or physically measured. These assets represent rights to receive future payments that are not due at the balance sheet date. Notes receivable are considered current assets if they are to be paid within 1 year and non-current if they are expected to be paid after one year. 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.

An allowance for doubtful accounts is a contra-asset account that reduces the total receivables reported to reflect only the amounts expected to be paid. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. Key examples of contra accounts include accumulated deprecation and allowance for doubtful accounts. Contra asset accounts are necessary for companies for various reasons.

An example would be a contra liability account which would be debited to offset a regular liability account. For instance, the allowance for doubtful accounts reduces the net amount of accounts receivable, while the reserve for obsolete inventory does the same for inventory. Similarly, accrued liabilities reduce the total amount of current liabilities.

Types of Contra Account

This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders. Accumulated depletion is the counterpart of natural resource assets. Which of these accounts would normally not be affected by an adjustment?

This account is paired with and offsets another asset account, so that a net balance is reported on the balance sheet. When examining the term “contra asset account,” look no further than the root of contra to get a vague grasp of the definition. Because contra means “against,” one could quickly conclude that a contra asset account is going to be an account that goes against the regular asset account on the Balance Sheet. But in all actuality, what are contra asset accounts? Quite frankly, the actual definition is not far from this estimate. In a sense, a contra asset account is a negative asset account that detracts from all of the other assets included in the balance sheet.

Our experts love this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee. You can estimate the total to record in the allowance for doubtful accounts based on uncollectible revenue totals from the previous year or you can conservatively estimate the amount. The sales allowance shows the discounts given to customers when returning the product. This is done to entice customers to keep products instead of returning them. For example, items with slight faults being sold with a discount. The percentage of sales method assumes that a fixed percentage of goods or services sold by a company cannot be received.

Instead, the existence of https://1investing.in/ asset accounts for companies will differ based on a company’s requirements. However, there are some prevalent contra asset accounts that may exist for all companies. A contra asset account is an account that opposes the balances of other asset accounts. As mentioned, a company will usually have debit balances in its asset accounts. However, the details for contra accounts usually exist on the notes to the financial statements.

• In the books, the account of the asset would have a debit value of $100,000, and the CA account would have a credit value of $30,000.
• Contra assets have natural credit balances.
• They are useful in preserving the historical value in the main account while presenting a write-down or decrease in a separate contra account that nets to the current book value.
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• A contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit balance.
• You’ll continue to use the contra asset account until the equipment has been completely depreciated, retired, or sold.

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. A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity). The proper size of a contra asset account can be the subject of considerable discussion between a company controller and the company’s auditors.

An example of recording a contra asset

Whenever the public accounting 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. Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts. This helps the firms to evaluate the book value of their assets and liabilities. If the equipment account has a balance of $80,400 and its accumulated depreciation account has a balance of $22,500 the book value of the equipment is __________.

Contra accounts act like regular accounts on the balance sheet but have a unique purpose. 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. When recording assets, the difference between the asset’s account balance and the contra account balance is the book value of the asset. There are two major methods of recording a contra account.

• The net value of both these figures is usually reported on a third line.
• Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc.
• Accumulated deprecation represents the cumulative amount of depreciation expense charged against an asset.
• In response, the firm should decrease its accounts receivable and revenue balances.

Both the asset and the corresponding CA accounts must be stated clearly in the balance sheet. Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset’s net value or book value. In the books, the account of the asset would have a debit value of $100,000, and the CA account would have a credit value of $30,000.

However, some asset accounts need a negative counterpart to reduce the balance of that account. The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. Taking into account the list of contra asset accounts, how would you calculate the net value of assets? If the example looks difficult, rest assured the solution is very simple. Because contra assets simply detract from the total value of the asset account, all one has to do is add up all the assets together first.