Allowance for Doubtful Accounts: Methods of Accounting for

contra asset account

Overall, contra accounts are offsetting balances that are the opposite of specific accounts. There are several examples of contra accounts, including accumulated depreciation, accumulated depletion, accumulated amortization, allowance for receivables, etc. These are all examples of contra-asset accounts, which are the prevalent type of contra accounts.

Impact on Financial Statements

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. are used to reduce the value of related asset accounts, providing a more accurate representation of a company’s financial position.

Definition of Contra Asset Accounts

Understanding the different types of contra asset accounts and their accounting treatments is essential for maintaining precise financial records. Contra asset accounts are a type of contra account that net off against asset accounts. These include accumulated depreciation, accumulated amortization, allowance for receivables, obsolete inventory, and discount on notes receivables.

Bookkeeping with Contra Asset Accounts

Therefore, contra-asset accounts differ from other accounts that have a credit balance. These entries effectively increase the balance of contra asset accounts and decrease the value of the related asset on the balance sheet. Your bank account, the inventory you currently stock, the equipment you purchase, and your accounts receivable balance are all considered asset accounts.

contra asset account

Creating this contra asset account builds in a safeguard against overstating your accounts receivable balance. 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. Contra equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock.

contra asset account

  • The balance sheet presentation of fixed assets, thus, includes their historical cost followed by the accumulated depreciation to arrive at the net book value.
  • For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately.
  • 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.
  • For instance, if a customer returns a $1,000 product, the company will debit the sales returns and allowances account by $1,000, reducing the net sales figure.
  • In regards to your concern, the Accumulated Depreciation will not automatically set as a contra account in QBO.

In the practice of bookkeeping, contra assets play a fundamental role in presenting a clear picture of a company’s financial health. They are used to adjust the value of related asset accounts and reflect transactions that affect a company’s financial statements. These methods affect the depreciation expense reported on the income statement and accumulated depreciation, which is the contra-asset account used to reduce the carrying amount of the fixed assets. A contra asset account normally holds a credit balance as it is meant to reduce the debit balance of its corresponding asset.

Why Use a Contra Account?

Far less common is the obsolete inventory reserve, which reduces the overall inventory value on the balance sheet. This contra account holds a reserve, similar to the allowance for doubtful accounts. For each debit against the inventory account, there will be a corresponding credit against the obsolete inventory contra account. The allowance for doubtful accounts is a contra asset because it reduces the value of the accounts receivable (AR) account on the general ledger. Often when a company extends goods on credit, management expects some of those customers not to pay and so anticipates writing off bad debt.

  • The income statement also benefits from the use of contra asset accounts.
  • A Pareto analysis is a risk measurement approach that states that a majority of activity is often concentrated among a small amount of accounts.
  • Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.
  • Accurate depreciation accounting ensures that the asset base used in the ROA calculation is realistic, thereby providing a true measure of profitability.

Revenue Contra Account

As mentioned, a company will usually have debit balances in its asset accounts. 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 the balance sheet and are reported as subtractions from these accounts. In other words, contra accounts are used to reduce normal accounts on the balance sheet.

Leave a Reply

Shopping cart


No products in the cart.

Continue Shopping