6 Types of Contra Asset Accounts and What They Mean

What is a Contra Asset Account?

Before we start talking about the finer details, it’s important to know what is a contra asset account. The contra revenue account is a reduction from gross revenue, which results in net revenue.

The projected bad debt expense is properly matched against the related sale, thereby providing a more accurate view of revenue and expenses for a specific period of time. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets.

Contra account entry

The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline. For all transactions, the total debits must be equal to the total credits and therefore balance. The Equity section of the balance sheet typically shows the value of any outstanding shares that have been issued by the company as well as its earnings. All Income and expense accounts are summarized in the Equity Section in one line on the balance sheet called Retained Earnings. This account, in general, reflects the cumulative profit or loss of the company.

  • Since we are unsure of exactly which customer would default his payment, we can’t directly credit the accounts receivable account or the accounts receivable subsidiary ledger.
  • Examples of contra assets include Accumulated Depreciation and Allowance for Doubtful Accounts.
  • For example, a company might have a contra asset account for depreciation expense and a separate asset account for equipment cost.
  • Revenue is an income statement account, but it flows through to the equity section of retained earnings as well.
  • Examples are accumulated depreciation against equipment, and allowance for bad debts against accounts receivable.

This method uses the initial purchase value and subtracts the accumulated depreciation value for the time period to result in the total value of the equipment after its use. The difference between an asset’s account balance and the contra account balance is known as the book value. The amount is reported on the balance sheet in the asset section immediately below accounts receivable.

Accounting Topics

However, this account does not represent actual irrecoverable debts. Therefore, contra accounts are the reverse accounts that decrease a specific account’s balance. In accounting lingo, a dual entry account system includes the concept of a contra entry. It’s an entry that’s the offset or reverse of an entry that’s on the other side of the account. An entry will be recorded on the credit side if and when a debit entry is recorded in an account and vice-versa. 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.

If you know that on average, 2% of your accounts receivable go unpaid, that makes a good figure to use for https://personal-accounting.org/ your contra account. This avoids the unpleasant shock you might get if you underestimate potential losses.

Contra Asset, Contra Liability & Contra Equity

Contra accounts are confusing at first, but, with a little study, understanding them becomes second What is a Contra Asset Account? nature. Let’s go over how they work and what the main types are, and then finish with an example.

  • On the sale on account’s attached contra asset account, this will be recorded as accounts receivable.
  • The contra revenue accounts commonly used in small-business accounting include sales returns, sales allowance and sale discounts.
  • Including contra asset accounts on your balance sheets can be hugely beneficial for your business.
  • Companies bury them in the footnotes and often don’t break out the actual calculation.

You can see in the above examples that the amount not collected from the customer is well documented. This allows the company to know the amount uncollected from each customer. Such information can be used in the future to try and collect on outstanding debt. Knowing a business is high risk can help in building a more robust debt collection policy.

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He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. When the two balances are offset against each other they show the net balance of both accounts. Contra accounts are needed for determining the book value of assets held by a company. 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. Globally Accepted Accounting PrinciplesGAAP are standardized guidelines for accounting and financial reporting. It also helps create reserves, and later any change in the expected number can be adjusted through allowances and reserves.

What is a Contra Asset Account?

This essentially erases the asset on your financial statement, leaving you with a total amount of $0. An example of contra equity with buying back shares or stock would be a company that has issued shares to the public. The contra equity account would be used to offset the equity account on the balance sheet.

List Of Contra Accounts With Examples

These billings may usually be documented on invoices, which are then summarized in an aging report for all the business’s accounts receivable. 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. Mark to market is a method of measuring the fair value of accounts that can fluctuate over time, such as assets and liabilities. She is an expert in personal finance and taxes, and earned her Master of Science in Accounting at University of Central Florida. 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 .

You can estimate based on experience, but you won’t know for sure until they actually pay. These balances come from an underlying accounting or accumulation of accounts from the financial systems. However, some items may also reduce the total reported amount on these accounts. As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find.

Discount On Bonds PayableDiscount on bonds payable is the markdown value of a bond’s coupon rate or selling price compared to its market interest rate or fair value.

What is a Contra Asset Account?

The information featured in this article is based on our best estimates of pricing, package details, contract stipulations, and service available at the time of writing. Pricing will vary based on various factors, including, but not limited to, the customer’s location, package chosen, added features and equipment, the purchaser’s credit score, etc. For the most accurate information, please ask your customer service representative. Clarify all fees and contract details before signing a contract or finalizing your purchase. Each individual’s unique needs should be considered when deciding on chosen products. To record a revenue contra account, the company must be able to determine how much the contra account is. The contra equity account treasury stock is reported right on the balance sheet.

For example, assets usually constitute a debit balance on the balance sheet. A contra asset account includes a credit balance that reduces the amount reported for those assets. However, this account does not appear on its own on the balance sheet. In order to balance the journal entry, a debit will be made to the bad debt expense for $4,000. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month.

Contra accounts are commonly found on general ledgers where all of a business’s accounts and transactions are organized on a master list. The contra account is used to report the correct assets while preserving the transactions and balance of the relating account. The most common contra assets are accumulated depreciation and the allowance for doubtful accounts. For example, the debit will be to the expense account in an estimated uncollectible amount from a credit sale. The credit will be to the asset account or allowance for doubtful accounts.

A company’s financial accounts will usually have three types of items. Hopefully, you have a pretty clear idea of contra asset meaning—no need to ask to define contra asset accounts anymore. Including contra asset accounts on your balance sheets can be hugely beneficial for your business.

If your credit policy doesn’t reflect when to write off bad debt, below are a few tips that can help get you started. The Statement of Shareholders’ Equity is one of the four major financial statements. The function of the Statement of Shareholders’ Equity is to show changes in the value of equity in a corporation…. The Statement of Owner’s Equity is one of the four major financial statements. The function of the Statement of Owner’s Equity is to show changes in the value of equity in a corporation. As a principle IMHO it is wrong because most readers of financial statements (i.e., investors and creditors) never hear of, nor really care about EITF 01-14.

The contra liability account would be used to offset the liability account on the balance sheet. They wouldn’t know any of that if you just subtracted depreciation and recorded only the asset’s net value. If your factory equipment represents a $1.7 million asset but it’s depreciated by $700,000, you’d record the depreciation in a contra asset account.