Learn About Contra Asset Account

The https://bookkeeping-reviews.com/ balance in this account is amortized or allocated to Interest Income or Interest Revenue over the life of a note receivable. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. A contra account is a balance sheet account that is used to offset a related asset, liability, or equity account. Contra accounts are used to ensure the proper valuation of these items is reflected on the balance sheet. Contra liabilities are common in companies that sell bonds to raise capital. To drum up interest in the bond, the company will sell it at a discount. For example, a bond with a principal amount of $1,000 may be sold for only $950.

• Robert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive.
• Reserve for obsolete inventory is a contra asset account that is used to reduce the net value of a company’s balance sheet.
• Allowance for doubtful accounts offsets a company’s accounts receivable account.
• 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).
• If one account is debited for $100, then another account must be credited for the same amount.

Any products that are sold at a discount or returns are deducted from gross revenue to produce net revenue as the top line on the income statement. The annual amortization of the cost of an asset is referred to as depreciation expense. The corresponding effect is charged to accumulated depreciation accounts. Accumulated depreciation accounts accumulate the depreciation expense charged on the asset. The above accounts are the standard items that a company’s financial statements will include. However, there are other items as well that may not show in those financial statements.

Examples of Contra Asset Accounts

The contra revenue accounts commonly used in small-business accounting include sales returns, sales allowance and sale discounts. A contra revenue account carries a debit balance and reduces the total amount of a company’s revenue. The amount of gross revenue minus the amount recorded in the contra revenue accounts equal a company’s net revenue. A transaction is made under the sales return account when a customer returns a product to the company for a refund. Sales allowance represents discounts given to customers to entice them to keep products instead of returning them, such as with slightly defective items. The sales discount account represents the discount amount a company gives to customers as an incentive to purchase its products or services. It carries a credit balance and is linked to the fixed asset account, which carries a debit balance.

An organization would rather record $100,000 as an asset and would amortize $10,000 depreciation each year for the next 10 years. This results in compliance with the accrual concept while reflecting on an accurate accounts receivable balance. Accounts receivable result in a cash inflow to an organization when they repay their dues. They are the current assets of a company expected to be realized within 12 months. It is prepared when there is a reduction in the value of assets due to wear and tear continuous use or when we expect that a certain percentage of accounts receivable will not be received.

What Are the Different Types of Contra Accounts?

Debit accumulated depreciation -equipment for $16,875 and credit depreciation expense for $16,875. Debit depreciation expense for $18,625 and credit accumulated depreciation-equipment for $18,625.

Each of these has a unique purpose, but all are used to reduce the value of an asset on the balance sheet. Explain where a “gain on sale of assets” goes on the cash flow statement.

What Happens to the Balance Sheet When Accounts Receivable Is Collected?

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 reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities include discount on notes or bonds payable.

• In a balance sheet, accumulated depreciation would be reflected as a reduction from the asset’s account so that the net balance is evident.
• These include accumulated depreciation, accumulated amortization, allowance for receivables, obsolete inventory, and discount on notes receivables.
• Accounting EntryAccounting Entry is a summary of all the business transactions in the accounting books, including the debit & credit entry.
• The contra asset account is later reduced when the expense is recorded.
• These balances cannot offset asset accounts that do not relate to them.

A contra account is used for account classification and is also reported in a company’s financial statement alongside its corresponding or related account. When reporting a contra account in a company’s financial statement, it is reported immediately below the account it relates to or corresponds. Contra accounts have different names depending on the account they correspond. For instance, a contra account that relates to an accounts receivable is called a contra asset account.

Allowance for Receivables

Accumulated depreciation accounts accumulate the depreciation expense provided so far about the corresponding asset. It is shown as a reduction to the asset account and is reversed when the asset is disposed of. Allowance for doubtful debts accumulates the bad debt expense that has been provided so far. Any company that owns intangible assets such as software, patent, etc., will maintain an accumulated amortization account. Similar to depreciation, this account plays a significant role in representing the book value of a company’s assets. Contra assets are credit accounts that carry their own values that when combined with the value of the paired account, informs the balance sheet. The difference between an asset’s account balance and the contra account balance is known as the book value.

Accounts receivable is rarely reported on the balance sheet at its net amount. Instead, it is reported at its full amount with an allowance for bad debts listed below it. Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off. 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. Finally, take the total of depreciation and subtract it from total assets.