Learn About Contra Asset Account

So, contra assets have a credit balance, whereas assets normally have a debit balance. A contra-asset account stores a reserve which reduces the balance of the paired account. The reason to show this information separately in a contract-asset account is to see the extent to which the corresponding asset should be reduced. Instead, the existence of contra 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.

If the related account is a liability account, then a contra liability account is used to offset it with a debit balance. Thus, the natural balance of a contra account is always the opposite of the account with which it is paired. Contra assets and contra liabilities are listed on a company’s balance sheet and carry balances opposite of their related accounts. Unlike regular assets and liabilities, contra assets typically keep a credit balance and contra liabilities typically keep a debit balance.

What Is a Contra Account & Why Is It Important?

Hence, the book value of the liability will be the credit balance of the liability account minus the debit balance of its contra liability counterpart. Therefore, in the allowance method, relevant bad debt expense is recorded and accounts receivable are written off when these are considered not recoverable. The purpose of a contra account is to accurately report value of operating performance and assets for a firm. A contra account is an account that records events like adjustments and transactions that are having an opposite effect on a relating account’s true value on the firm’s financial statements. If we record those events within the relating account, we risk losing information that is relevant to analyzing performance. Original issue discounts (OID) are a type of contra liability like financing fees because they are also amortized over a loan’s term and reduce pre-tax income.

Contra assets are negative asset accounts that show an opposite balance to a normal account in the same asset category. The purpose of a contra asset account is to offset the asset account and show a reserved amount that reduces the balance of the corresponding asset account. The balance in a contra asset account allows the accountant, tax preparer, or other end-user to know how much to subtract from the paired asset’s value. The equity section of the balance sheet is where the shareholder’s claims to assets are reported. The main contra equity account is treasury stock, which is the balance of all stock repurchased by the company.

Definition Of a Contra Account?

Accounting is how we tell a story about an economic event or financial transaction, such as a purchase or a withdrawal of money, for example. Periodic financial statements report the impact of the story and are used by leaders of a firm or industry to analyze performance, plan, and respond. An example of accumulated depreciation how to calculate cost of goods sold includes a company that purchased a truck for $25,000. The company assumes a five-year useful life and uses the straight-line depreciation method. At the end of year three, the company has accumulated depreciation of $15,000, and the asset’s book value is $10,000 (purchase price, less accumulated depreciation.

As asset accounts have debit balances, contra asset account will have credit balance. This is done in order to separate data in these accounts for the analysis and presentation purposes. The depreciation expense of $10,000 is an income statement account that lowers the company’s income. The accumulated depreciation journal entry adds $10,000 to the total deprecation taken to date.

What are examples of contra accounts?

Balance sheets are important financial documents that include detailed information about a company’s assets and their original and present value. The accumulated depreciation on the balance sheet is the total depreciation that is reduced from the value of an asset and recorded on the credit side to offset the balance of the asset. Contra liability accounts are less commonly used than contra asset accounts. Contra liability accounts are mainly used by corporations that issue bonds frequently.

You must also report the amount that you can reasonably expect will not be paid, if it is estimable and probable. You could simply adjust the parent account…but then you are missing an essential part of the story — how many patients were actually treated today for a sprain. To report the real value of the financial statement, you will need to record the amount you can reasonably estimate that will probably effect the financial statement classification.

The Contra Asset Account

As mentioned, CA accounts usually have a negative value which is the same as a credit balance. That is to completely or partially offset the balance of their related asset accounts. Asset accounts usually have a positive value which is the same as a debit balance. In general, accounts receivable are converted into cash within the operating cycle.

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. At first glance, contra accounts may seem complicated, but contra accounts exist to simplify financial statements. Contra asset accounts appear as a credit balance and reduce the value of assets. Contra liabilities appear as a debit balance and reduce the amount a company owes.

Is Cost Reduction a Good Thing?

Contra revenue accounts show the deducting adjustments to gross revenue or producing net revenue. Sales returned for a refund are posted to the contra account to reduce gross revenue or return on sales. The other side of the transaction is posted to cash because there is no value in retaining the sales transaction in the cash account. So far, we’ve discussed contra asset accounts, which offset the value of asset account balances. Contra accounts can be used for all of the financial components on the balance sheet including assets, liabilities, and equity.