After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. The estimated life of the machinery is 10 years and every year, 10% of the value is written off as deprecation (Straight-line method). This helps the reader to know how many sales were actually made and how many customers had problems with the goods sold. A business called Show-Fleur offers private driving tours of local botanical gardens — all from the comfort of high-end limousines. For its day-to-day operations, the business maintains a fleet of 75 identical 2016 Ford Explorer limousines, each initially retailing at $150 thousand. However, these vehicles have experienced significant wear and tear in the intervening years.

Benefits of Contra Accounts

The expense account uses its debit balance to reduce the revenue account’s credit balance. Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements. Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. The most common contra account is the accumulated depreciation account, which offsets the fixed asset account. Taken together, the asset account and contra asset account reveal the net amount of fixed assets still remaining.

Contra asset accounts journal entries

• For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance.
• Wanting to spruce up its aging inventory, Show-Fleur purchased new, climate controlled-seats for its fleet, delivering increased comfort for passengers and a cleaner, more modern look for vehicle interiors.
• The example for contra liability accounts includes, discount on bonds payable and discount on notes payable which carry normal debit balances.
• To convert your invoice management efforts to an electronic format that can easily share data with other financial systems, businesses can leverage Invoiced’s E-invoice Network.
• Contra asset accounts include allowance for doubtful accounts and the accumulated depreciation.

By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes. 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. Creating allowances for doubtful accounts represents the percentage of accounts receivable a company believes it cannot collect. Such allowance for doubtful accounts offsets a company’s accounts receivable account. Instead of reporting the assets at their carrying amount directly, assets are reported at their historical costs and are reduced to book value by reporting the allowance for depreciation along with it.

Contra asset account definition

For example, if the contra account is related to an asset then it would be referred to as contra asset and reported on the statement of financial position right below the related asset, reducing it to its net realizable value. Overall, while maintaining contra accounts may require additional effort, the benefits they offer in terms of financial transparency and accountability make them an essential tool in accounting. By understanding the nature and function of contra accounts, businesses can accurately reflect their financial position, providing transparency to stakeholders such as investors, creditors, and internal management.

Recording Contra Accounts

• 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).
• Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount.
• There is the existence of contra accounts in accounting which are accounts that have the purpose of decreasing the value of another specific account if the two accounts are netted or summed together.
• In this way, the historical cost, the amount of write-off, and the book value of an asset can always be seen on the balance sheet.
• Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset’s net value or book value.
• For example, we need to keep the face value of a bonds payable and the premium amount in separate ledger accounts even though both have credit balances.

For instance, to increase asset and expense accounts, we simply record a debit and to decrease those accounts, we can record a credit. For example, if the balance of accumulated depreciation increases from $20,000 to $50,000, this means that the depreciation expense amounts to $30,000, which will be listed in the income statement. contra accounts act like regular accounts on the balance sheet but have a unique purpose. If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative. On the other hand, if you’re looking at a high-flying growth stock that reports new revenue growth records each quarter but has a massive allowance for doubtful accounts, there may be problems ahead.

• Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares.
• 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.
• The accumulated depreciation will ultimately reduce the value of fixed assets when the two accounts are netted with each other.
• Instead of reporting the assets at their carrying amount directly, assets are reported at their historical costs and are reduced to book value by reporting the allowance for depreciation along with it.
• Companies like to depreciate assets as quickly as possible to get the tax savings, so the balance sheet may not state the true value of fixed assets.

In order to keep the accounts receivables as clean as possible with their historical values, we will use this contra account called allowance for doubtful accounts. Sometimes, it is important to keep the original balance of the accounts and create the contra accounts to be able to calculate the net value of the account. Whenever the balance of an account needs to be reduced in a company’s ledger, it is not always applicable to credit the account if it is an asset or debit the account if it is a liability.

What is a Contra Asset Account?

In a report, layering on that additional context can be easy, but in a general ledger, you have few options for conveying nuance and subtlety. Namely, within a ledger, each account is intended to contain transactions and balances of a similar type only. But sometimes, dissimilar transactions are important to consider together within a ledger.

Offsetting the asset account with its respective contra asset account shows the net balance of that asset. In finance, a contra liability account is one that is debited for the explicit purpose of offsetting a credit to another liability account. In other words, the contra liability account is used to adjust the book value of an asset or liability.

Example #1: Revenue Contra Account