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Along with her writing work, Nora is an entrepreneur and consultant who opened an all-tap wine bar in New York’s East Village dubbed Lois and owns a sophisticated snack food business Aida. For her businesses, Nora is responsible for finances, marketing, operations, and fundraising. Along with The Balance, her writing has appeared in Thrillist, Insidehook and Vinepair.
In case a customer returns a product, the company will record the financial activity under the sales return account. You don’t have to, yet even a small business will benefit by using the contra asset account for accounts receivable. This eliminates the need to write off large accounts receivable balances at year end since they’ve already been accounted for.
How are Contra Accounts Used and Reported?
Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R). Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life to account for declines in value over time. The difference between an asset’s account balance and the contra account balance is known as the book value. A contra account is a general ledger account with a balance that is the opposite of another, related account that it is paired with.
What Are the Different Types of Contra Accounts?
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. Contra revenue accounts reduce revenue accounts and have a debit balance.
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. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation.
Why are Contra Accounts Important?
The amount on the equity contra account is deducted from the value of the total number of outstanding shares listed on a company’s balance sheet. The balance in the allowance for doubtful accounts is used to find out the dollar value of the current accounts receivable balance that is deemed uncollectible. 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. In double-entry accounting, a credit to an asset account will represent an increase in the asset account balance, and a debit will represent a decrease in the asset account balance. Adjunct accounts and contra accounts may be seen on the balance sheet and chart of accounts of certain companies. This is dependent on if they have receivable accounts and depreciation accounts.
The contra asset account carries a credit balance because an asset account usually has a debit balance. Such accounts are allowance for doubtful accounts and the accumulated depreciation account. The same is true for other asset accounts like accounts receivable. Accounts receivable is rarely reported on the balance sheet at its net amount.
Examples of Contra Assets
Including contra revenue accounts is important in the income statement because it shows the original amount of sales the firm has made, along with any factor that has reduced that amount. Contra liability accounts are special accounts in the liabilities section of the balance sheet.
Which accounts are contra accounts?
A contra account is a negative account that is netted from the balance of another account on the balance sheet. The two most common contra accounts are the allowance for doubtful accounts/bad debt reserve, which is subtracted from accounts receivable, and accumulated depreciation, which is subtracted from fixed assets.
When examining the term “contra asset account,” look no further than the root of contra to get a vague grasp of the definition. Because contra means “against,” one could quickly conclude that a https://www.wave-accounting.net/ is going to be an account that goes against the regular asset account on the Balance Sheet. Quite frankly, the actual definition is not far from this estimate. In a sense, a contra asset account is a negative asset account that detracts from all of the other assets included in the balance sheet. More specifically, record the contra asset as a credit that is supposed to balance out a correlating plant asset. The situations that contra asset accounts appear are the ones dealing with Depreciation, which will be explored below. Balance sheet, users of financial statements can learn more about the assets of a company.
