What Is a Contra Asset?

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. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance.

Contra accounts are crucial in reducing the balance on the paired account. However, contra accounts allow them to track these transactions separately. Furthermore, these accounts are also crucial in allowing companies to record the original values for the paired accounts. 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. Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets.

Depreciation Expense Account Vs. Allowance for a Depreciation Account

The amount is reported on the balance sheet in the asset section immediately below accounts receivable. The net of these two figures is typically reported on a third line. To oppose the revenue made by a company, contra revenue accounts must have a debit balance.

• The accounting entry for this is debit, bad debt expense and credit to accounts receivable.
• Obsolete inventory is defined as a company’s products or goods that have become obsolete, or unusable, as a result of routine use and operations.
• Taking into account the list of contra asset accounts, how would you calculate the net value of assets?
• This means that its natural balance is a credit that reduces the asset’s overall value.
• Contra accounts are used to directly lower the original account, which helps to maintain financial accounting records clear.

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. The amount in the accumulated depreciation account is deducted from the assets of a company, such as buildings, vehicles and equipment. This can help anyone viewing the financial information to find the historical cost of the asset. The accumulated depreciation amount shows how much depreciation expense has been charged against an asset.

Requirements of contra asset accounts:

The percentage of sales method assumes that a fixed percentage of goods or services sold by a company cannot be received. In many cases, members can earn higher yields and avoid fees by maintaining higher account balances. Contra accounts appear on the same financial statement as the related account, usually directly below it, with a third line representing the net amount. The building is projected to remain operational for 20 years and to be worth $10,000 at the end of that time. Every year for the next 20 years, the corporation would recognize $20,000 in accumulated depreciation. An organization would rather record $100,000 as an asset and would amortize $10,000 depreciation each year for the next 10 years.

• The percentage is simply computed by dividing 100% by the number of years of usable life.
• This account appears next to the current asset Accounts Receivable.
• A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment.
• These balances cannot offset asset accounts that do not relate to them.
• A contra account is an account that companies use to reduce the value of a related account.
• This contra account holds a reserve, similar to the allowance for doubtful accounts.
• Overall, contra accounts are offsetting balances that are the opposite of specific accounts.

Osman started his career as an investment banking analyst at Thomas Weisel Partners… This content was originally created by member WallStreetOasis.com and has evolved with the help of our mentors. Nearshoring, the process of relocating operations closer to home, has emerged as an explosive opportunity for American and Mexican companies to collaborate like never before. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.

THE ANNUAL PERCENTAGE YIELD: How It Works With Your Savings Account

The first time a contra asset account is recorded in a journal entry, it is to be deducted from the expense. 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. Contra equity accounts https://simple-accounting.org/what-is-a-contra-asset-account/ are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds. Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances. The same is true for other asset accounts like accounts receivable.

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. Key examples of contra asset accounts include https://simple-accounting.org/ allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts reduce accounts receivable, while accumulated deprecation is used to reduce the value of a fixed asset.

Allowance for Doubtful Accounts

This type of account can also be called the bad debt reserve or allowance for doubtful accounts. However, some asset accounts need a negative counterpart to reduce the balance of that account. The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. Contra assets, which are still recorded with other assets, have the opposite type of natural balance to assets, which generally have positive debit balances.

• By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount.
• However, bad debt expense can arise to the sales made in earlier periods.
• The accounting entries for accumulated amortization are as follows.
• When a contra asset account is first recorded in a journal entry, the offset is to an expense.

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.