What Is a Contra Asset?

These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount. An entry is made to the depreciation expense account, offsetting the https://business-accounting.net/ credit to the accumulated depreciation account. The accumulated depreciation account, which offsets the fixed assets account, is considered a contra asset account. Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset.

Note that the debit to the allowance for doubtful accounts reduces the balance in this account because contra assets have a natural credit balance. Also, note that when writing off the specific account, no income statement accounts are used. This is because the expense was already taken when creating or adjusting the allowance. Contra liability accounts are less commonly used than contra asset accounts.

Amortization expense vs. depreciation expense

The accounting entries for a discount on notes receivables are as follows. Therefore, these companies must maintain an obsolete inventory reserve account to net off any unusable stock from the account. This requirement also comes from the accounting standard for inventories. Looking for a comprehensive fixed asset and depreciation accounting software? Thomson Reuters Fixed Assets CS has the tools to help firms meet all of a client’s asset management needs.

• For example, a contra accumulated depreciation account can offset a fixed asset.
• Contra liability accounts are less commonly used than contra asset accounts.
• After each accounting period, the company records a depreciation expense of the asset.
• A contra account is an account that companies use to reduce the value of a related account.

Accounts Receivable is an asset account that represents the amount of money due to a business for goods or services that have been delivered or used but not yet paid for by customers. As mentioned, companies do not represent these accounts on the balance sheet. However, they will still appear on the notes to the financial statements with necessary disclosures. Contra asset accounts are necessary for companies for various reasons.

Historical Percentage Method

The aggregate of all group results is the estimated uncollectible amount. A contra account is a general ledger account with a balance that is opposite of the normal balance for that account classification. The use of a contra account allows a company to report the original amount and also report a reduction so that the net amount will also be reported. The net amount is often referred to as the carrying amount or perhaps the net realizable amount. A contra account carries a balance that is opposite to the normal balance of its related main account.

What is a Contra Account?

This account is used to estimate the amount of money that is not likely to be collected from customers. Below is the asset account debit balance and accumulated depreciation account credit balance on the balance sheet. They are usually subcategory accounts linked to an account on the balance sheet. Contra accounts are used to offset each other and reduce the gross amount.

AccountingTools

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 https://kelleysbookkeeping.com/ of accounts is 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.

Contra Revenue Account

The most prominent of these include allowing companies to present a more accurate picture of their assets. On the other hand, accumulated depreciation is a contra-asset account. Instead, the https://quick-bookkeeping.net/ existence of contra-asset accounts for companies will differ based on a company’s requirements. For example, if an account has a debit balance, a contra account will have a credit balance.

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The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold. It can help companies see the complete picture of their income and expenses and their equity or net worth. All in all, contra accounts are an important tool for businesses to use to understand their financial standing better. Because the allowance for doubtful accounts is established in the same accounting period as the original sale, an entity does not know for certain which exact receivables will be paid and which will default. Therefore, generally accepted accounting principles (GAAP) dictate that the allowance must be established in the same accounting period as the sale, but can be based on an anticipated or estimated figure. The allowance can accumulate across accounting periods and may be adjusted based on the balance in the account.