Contra Asset Account Definition, List Examples with Accounting Entry

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Contra LiabilityFinancing fees in M&A are an example of a contra liability, as the fees are amortized over the debt’s maturity – which in turn reduces the tax burden until the end of the term.

As mentioned above, the primary situation in which contra asset accounts appear has to do with accumulated depreciation. Therefore, an example of a contra asset account involved with a depreciation situation seems reasonable to observe. Nova Incorporated is attempting to finalize their balance sheet in terms of the net value of their assets. At the end of the year, their assets are as follows… Nova Company valued a van at $30,000, an office building at $500,000 and office equipment at $20,000.

At the same time, depreciation for the van at the end of the year ended up at $500. And the depreciation for the office equipment ended up at $1,000. Most accountants choose to record the depreciation over the useful life of an item in the accumulated depreciation contra asset account, which is a credit account. The balance sheet would show the piece of equipment at its historical cost, then subtract the accumulated depreciation to reflect the accurate value of the asset.

Accumulated depreciation

The balance sheet shows the amount in the asset section underneath the accounts receivable. The net value of both these figures is usually reported on a third line. Likewise, when you pay a bill, your cash account is reduced because you’re lowering the balance. A contra account is an account with a balance opposite the normal accounts in its category. 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.

The allowance, sometimes called a bad debt reserve, represents management’s estimate of the amount of accounts receivable that will not be paid by customers. If actual experience differs, then management adjusts its estimation methodology to bring the reserve more into alignment with actual results. To oppose the revenue made by a company, contra revenue accounts must have a debit balance. Contra liability accounts are special accounts in the liabilities section of the balance sheet. They aim to reduce the balance of some related liability accounts.

Contra Asset Account Example

The account offsets the balance in the respective asset account that it is paired with on the balance sheet. The direct write-off method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible. Therefore, in the allowance method, relevant bad debt expense is recorded and accounts receivable are written off when these are considered not recoverable. In general, accounts receivable are converted into cash within the operating cycle.

Notes payable represents a liability created when a company signs a written agreement to borrow a specific amount of money. The lender may offer the company a discount if it repays the note early. The discount on notes payable reduces the total amount of the note to reflect the discount given by the lender.

This means that unearned revenue receivables have a debit balance of $10,000, and the firm credits revenue for $10,000. A customer returned $100 worth of items, claiming them to be defective. 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.” The method of estimating uncollectible accounts expense based on the accounts receivable balance emphasizes the determination of the net realizable value of the receivables. Allowance for doubtful debt is a contra account against which bad debts are charged. The journal entry is reversed as and when bad debts are recovered.

• A company may decide to buy back its shares when management feels the stock is undervalued or because it desires to pay stock dividends to its shareholders.
• Fixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time.
• For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets.
• At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset.

This would let users of the financial statements calculate the book value of the liability. The Allowance for Doubtful Accounts is a contra asset account that reduces the value of accounts receivable reported on the balance sheet. In the direct write-off method, bad debt expense is charged when these are incurred. The accounting entry for this is debit, bad debt expense and credit to accounts receivable. Here, accounts receivable are decreased in the period when bad debt expense is incurred. However, bad debt expense can arise to the sales made in earlier periods.

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Contra accounts increase transparency

Accumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset’s purchase price and its carrying value on the balance sheet. The proper size of a contra asset account can be the subject of considerable discussion between a company controller and the company’s auditors. The auditors want to ensure that reserves are adequate, while the controller is more inclined to keep reserves low in order to increase the reported profit level. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value.

There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. 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.

Valuing Notes Receivable

In accounting, goodwill is the value of an asset that is considered intangible but has a quantifiable “prudent value” in a business. While technically classified as an asset, it functions closer to a liability as it reduces the value of the asset it is paired with. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. Fixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples. Bad debt expense is an expense that a business incurs once the repayment of credit previously extended to a customer is estimated to be uncollectible.

Depreciation is not directly reduced from the asset so that the historic value/fair value of the asset could be presented in a balance sheet. Advisory services provided by Carbon Collective Investment LLC (“Carbon Collective”), an SEC-registered investment adviser. The discount on bonds payable amount shows the difference between the amount of cash received when issuing a bond and the value of the bond at maturity. For example, a building is acquired for $20,000, that $20,000 is recorded on the general ledger while the depreciation of the building is recorded separately.

Definition and Examples of Contra Assets

Put simply, contra accounts are used to reduce the normal accounts on the balance sheet. If the related account has a debit as the natural balance, then the contra account will record a credit. Contra asset accounts provide business owners with the true value of certain asset accounts. For example, let’s say your accounts receivable balance is currently $11,500, but you’re not entirely sure that you’ll be able to collect the entire balance due. Contra Equity Account – A contra equity account has a debit balance and decreases a standard equity account.

Suppose a clothing business has sold $50,000 of inventory on credit. In other words, accumulated depreciation will be $10,000 each year until the car depreciates to $0 twenty years later. The company uses the straight-line depreciation method for the car. 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. Depreciation is an expense that reflects the cost of uncollectible receivables.

The Allowance for Doubtful Accounts is a contra asset account that reduces the value of accounts… When bad debts are incurred, the allowance for doubtful debts would decrease and the accounts receivable would be reduced by that amount. In this method, bad debt expense is estimated for the period and is recorded as an expense while the allowance account is credited. Allowance for doubtful debts accounts are opposite to accounts receivable accounts. Accounts receivable are the customers to whom an organization had sold goods or provided services on credit.

Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset. Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement. Contra revenue accounts typically offset revenue accounts in a firm’s income statement.

The following information is available from the financial records of X Company. Units of production method of depreciation is used when the asset is not frequently used. The sales allowance shows the discounts given to customers when returning the product. This is done to entice customers to keep products instead of returning them. For example, items with slight faults being sold with a discount.

• Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc.
• They serve an invaluable function in financial reporting that enhances transparency in accounting books.
• A contra asset is a negative asset account that offsets the asset account with which it is paired.
• The sales allowance shows the discounts given to customers when returning the product.
• It is a standard business practice to prepare an estimate for the amount likely to go bad.

Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value. A contra liability is an account in which activity is recorded as a debit balance is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as contra asset accounts.

For example, when the credit amount in allowance for doubtful accounts increases, it is also recorded in the bad debt expense as a debit increase. The same is true for other asset accounts like accounts receivable. 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.

The “Allowance for Doubtful Accounts” account is best described as a contra-liability. A contra asset is an account that when increased, decreases the value of a related asset on the books. In the balance sheet, the accounts receivable would be reflected after adjusting this allowance account. If it is the first year of operation, there is no outstanding balance in the allowance account.

Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Therefore, a contra asset can be regarded as a negative asset account. Offsetting the asset account with its respective contra asset account shows the net balance of that asset. Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable.

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. At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset.