contra asset account definition and meaning

In either case, the net amount of the pair 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. Note that the contra liability account has a positive balance (a https://intuit-payroll.org/how-to-attract-startups-for-accounting/ debit 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. In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000.

A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity). 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 help companies record any reductions to their non-current and current assets.

What Is a Contra Account?

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.

In accounting, assets are things of value that your business owns. Your bank account, the inventory you currently stock, the equipment you purchase, and your accounts receivable balance are all considered asset accounts. In response, the firm should decrease its accounts receivable and revenue balances. That is done by crediting accounts receivable by $100 and debiting the contra revenue account sales returns and allowances for $100. Hence, the company will have gross revenue or net sales equal to $9,900. To oppose the revenue made by a company, contra revenue accounts must have a debit balance.

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The contra asset account Accumulated Depreciation is related to a constructed asset(s), and the contra asset account Accumulated Depletion is related to natural resources. 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. Although contra-asset accounts have credit balances, they do not appear in liabilities or equity. Usually, credit balances include items from one of those two natures.

• Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances.
• Writing off your obsolete inventory in this manner allows you to expense the cost of the obsolete inventory while also decreasing your current inventory balance using the contra asset account.
• The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible.
• To oppose the revenue made by a company, contra revenue accounts must have a debit balance.
• In accounting lingo, a dual entry account system includes the concept of a contra entry.

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. Key examples of contra asset accounts include allowance for doubtful accounts Law Firm Accounting and Bookkeeping 101 and accumulated depreciation. Accumulated depreciation reflects the reduction in value of a fixed asset. Even small businesses benefit immensely from contra asset accounts. Obsolete inventory or obsolete inventory reserves is another popular type of contra asset accounts.

What is a Contra Account?

The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables. A less common example of a contra asset account is Discount on Notes Receivable. The credit balance in this account is amortized or allocated to Interest Income or Interest Revenue over the life of a note receivable. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. 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.

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. However, a contra-asset account usually has a credit or nil balance. This account offsets the balance in the respective asset account that they pair with on the balance sheet. This account serves two purposes — tracking total depreciation expenses while providing you with the accurate book value of the asset being depreciated.

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Sometimes, the current value of a note receivable will fall compared to its face value. This process will give rise to a contra asset account which is the discount on notes receivables. Similarly, allowance for receivables will pair with accounts receivable balances. These balances cannot offset asset accounts that do not relate to them.

Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes. This first criterion means that the car will have a net value or book value of $0 once it is fully depreciated.

Contra accounts definition

This account appears next to the current asset Accounts Receivable. The account Allowance for Doubtful Account is credited when the account Bad Debts Expense is debited under the allowance method. The use of Allowance for Doubtful Accounts allows us to see in Accounts Receivable the total amount that the company has a right to collect from its credit customers. The credit balance in the account Allowance for Doubtful Accounts tells us how much of the debit balance in Accounts Receivable is unlikely to be collected.