Contra Account Definition

define contra asset account

On the other hand, if you’re looking at a high-flying growth stock that reports new revenue growth records each quarter but has a massive allowance for doubtful accounts, there may be problems ahead. Contra accounts can get buried in the footnotes of financial statements, but they could be a key piece of your investigation into a growth stock’s prospects.

  • They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting.
  • A contra asset account is an account that opposes the balances of other asset accounts.
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  • Furthermore, a contra asset account may also be regarded as a negative asset account because equalizing an asset account and contra asset account results in the asset’s net, or total, balance.
  • Therefore, the depreciation of the equipment increases by approximately $50,000 for each year of use.

Accumulated depreciation would be reduced from the equipment account and a net amount would be reflected in a balance sheet. Consequently, in the first year, the equipment would reflect a net value of $90,000, which is computed by deducting the accumulated depreciation from the equipment’s historical cost.

How Contra Asset Accounts Work

The following entry should be done in accordance with your revenue and reporting cycles , but at a minimum, annually. The information featured in this article is based on our best estimates of pricing, package details, contract stipulations, and service available at the time of writing. Pricing will vary based on various factors, including, but not limited to, the customer’s location, package chosen, added features and equipment, the purchaser’s credit score, etc. For the most accurate information, please ask your customer service representative.

Contra accounts are usually linked to specific accounts on thebalance sheetand are reported as subtractions from these accounts. In other words, contra accounts are used to reduce normal accounts on the balance sheet. Also, with IFRS asking to report it in a particular way, the accountants must be updated with recent changes to how the contra assets account should appear in the books of accounts. Revenue AccountRevenue accounts are those that report the business’s income and thus have credit balances.

A final word about contra asset accounts

Accumulated depreciation accounts are asset accounts with a credit balance . In accrual-basis accounting, recording the allowance for doubtful accounts at the same time as the sale improves the accuracy of financial reports. The projected bad debt expense is properly matched against the related sale, thereby providing a more accurate view of revenue and expenses for a specific period of time. In addition, this accounting process prevents the large swings in operating results when uncollectible accounts are written off directly as bad debt expenses. 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.

define contra asset account

Mark to market is a method of measuring the fair value of accounts that can fluctuate over time, such as assets and liabilities. 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.

Contra Equity Account

A contra asset is a negative asset account that offsets the asset account with which it is paired. The purpose of a contra asset account is to store a reserve that reduces the balance in the paired account. By stating this information separately in a contra asset account, a user of financial information can see the extent to which a paired asset should be reduced. Allowance for doubtful accounts is a contra asset account used to create an allowance for customers that 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. A contra equity account is a stockholders’ equity account with a negative balance.

A contra asset account is an account that opposes the balances of other asset accounts. define contra asset account As mentioned, a company will usually have debit balances in its asset accounts.

Discount on Notes Receivable

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. Accumulated deprecation represents the cumulative amount of depreciation expense charged against an asset.

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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. DateParticularsDr.Cr.Depreciation$10,000Accumulated Depreciation$10,000In the above example, depreciation is an expense account. On the other hand, accumulated depreciation is a contra asset account. The allowance for doubtful accounts is a contra asset because it reduces the value of the accounts receivable 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.

Both of these accounts offset each other to represent a net balance on a company’s balance sheet. For most companies, the contra asset accounts will also include several types.

define contra asset account

Sales Allowances-Sales allowances are also a part of the sales account. Sales allowance reduces the selling price when a customer agrees to accept a defective unit instead of returning it to the seller. Treasury Stock AccountTreasury Stock is a stock repurchased by the issuance Company from its current shareholders that remains non-retired. Moreover, it is not considered while calculating the Company’s Earnings Per Share or dividends.

Before understanding contra asset accounts, it is crucial to learn what contra accounts are. 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. Discount on notes receivable refers to a contra asset account that occurs when the current value of a note receivable amounts to less than the face value of the note.

  • However, bad debt expense can arise to the sales made in earlier periods.
  • Key examples of contra accounts include accumulated deprecation and allowance for doubtful accounts.
  • Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.
  • Accounts Receivable AccountAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment.
  • Contra Asset AccountA contra asset account is an asset account with a credit balance related to one of the assets with a debit balance.

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