Contra Asset Account Definition, List Examples with Accounting Entry

Financial Statements Of Any OrganizationFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period . Debit BalanceIn a General Ledger, when the total credit entries are less than the total number of debit entries, it refers to a debit balance. A debit balance is a net amount often calculated as debit minus credit in the General Ledger after recording every transaction. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account. For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.

• It can retire the shares, meaning that they will no longer be existent on the company’s financial statements as treasury stock.
• The bond is listed on the balance sheet at the full amount of $1,000, but the cash received is just $950, so a contra liability for the discount is listed to make the entry balance.
• These include accumulated depreciation, accumulated amortization, allowance for receivables, obsolete inventory, and discount on notes receivables.
• Contra assets allow for more granular visibility on the balance sheet by maintaining historical costs and independent values rather than reducing the original account directly.
• In other words, contra accounts are used to reduce normal accounts on the balance sheet.

The difference, which is $500, is thus listed as a discount on bonds payable and is debited to the contra liability account “discount on bonds payable.” Note that the contra liability account has a positive balance , and the liability account normally has a credit balance. 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. Regardless of that, allowance for receivables accounts will exist for all companies that have account receivable balances. This account helps companies present a more accurate accounts receivable balance on the financial statements.

What Other Types of Contra Accounts Are Recorded on the Balance Sheet?

Contra asset accounts are prepared so that a specific reverse effect on the corresponding asset could be recorded. Describe what accounts are considered liability and asset accounts. The decrease in the asset and accumulated depletion accounts reduces the balance to zero and removes the account from the balance sheet. The increase in the accumulated depreciation account reduces the asset to its current book value . In accounting, notes receivables are accounts to keep track of accrued assets that have been earned but not yet received. Allowance for receivables is an account that companies maintain to record possible bad debts. However, this account does not represent actual irrecoverable debts.

The auditors aim to keep the balances at their adequate levels, but the controller might want to keep them as low as possible to reduce expenses and maximize profit levels. Allowance for doubtful accounts, the counterpart of accounts receivable. Give an example of a contingent liability that is usually recorded in the accounts.

Do Contra Accounts Have Debit or Credit Balances?

Increase in assets would be a great sign for an organization’s success. 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. In accounting, intangible assets are defined as non-monetary assets that cannot be seen, touched or physically measured.

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. An example would be a contra liability account which would be debited to offset a regular liability account. The contra equity account reduces the total amount of shareholders’ equity.

Types of Contra Assets

On the other hand, accumulated depreciation is a contra asset account. This account will offset the asset’s value by $10,000 each year. 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. Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement. Contra LiabilityA contra liability is a liability account that carries a debit balance as opposed to a credit balance. 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.

At the end of year 20, the car and the https://bookkeeping-reviews.com/ accounts will be written off from the balance sheet, as the car will be a fully depreciated asset. Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost. Although they all aim at reducing the balance of some type of account, it is useful to have some general foundational knowledge of the different types of accounts. The definition can be expanded to include contra accounts in general. Contra accounts act like regular accounts on the balance sheet but have a unique purpose. 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.

Financial Management: Overview and Role and Responsibilities

For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets. Far less common is the obsolete inventory reserve, which reduces the overall inventory value on the balance sheet. This contra account holds a reserve, similar to the allowance for doubtful accounts. For each debit against the inventory account, there will be a corresponding credit against the obsolete inventory contra account. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete.