For example, a company has determined that 5% of their accounts receivable in the amount of $15,000 will become uncollectible. For accounting purposes and convenience of taxation, firms show the historical cost of accounts instead of directly showing the net value.
What Are Examples of a Contra Asset Account?
Key examples of contra asset accounts include 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.
Because contra assets simply detract from the total value of the asset account, all one has to do is add up all the assets together first. Finally, take the total of depreciation and subtract it from total assets. Then you will have the net total value of assets ($528,500). If a ledger were to be observed in this situation, then one would see a balance of three asset debits matched up against three contra asset credits .
Contra asset account definition
Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset. Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement. Examples of revenue contra accounts are Sales Discounts, Returns and Allowances. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean.
- In either case, the net amount of the pair of accounts is referred to as the book value of the asset account in question.
- 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.
- Contra EquityAn example of a contra equity account would be treasury stock, the amount paid to repurchase previous issuances of stock, which reduces shareholders equity and the total number of shares outstanding.
- By reflecting both accounts on the balance sheet, analysts can understand both the original price and the total decrease in value of a certain asset over time.
An example would be a contra liability account which would be debited to offset a regular liability account. Contra revenue account, which is used to record the net amounts and usually has a debit balance, as opposed to the revenue account that records the gross amounts. You’ll continue to use the contra asset account until the equipment has been completely depreciated, retired, or sold. The allowance for doubtful accounts is not specifically reported, but the 10 reported that the allowance is immaterial to the amount. This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms. Most accounts receivable would just be the time between purchase and credit card settlement.
Types of Contra Assets
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.
The company uses the straight-line depreciation method for the car. This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders. Accumulated depletion is the counterpart of natural resource assets.
Contra liability accounts
The https://bookkeeping-reviews.com/ equity account treasury stock is reported right on the balance sheet. Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period. To offset this, the allowance for doubtful accounts balance is adjusted via a credit, while the bad debt account is debited to balance out the AR account. When combined, the AR account and the allowance for doubtful accounts contra assets offer a projection of how much net cash is expected to be received from outstanding accounts. Contra assets may be stated in separate line items on the balance sheet.
- A contra liability account is a liability account that is debited in order to offset a credit to another liability account.
- For example, an asset was purchased by a company for $100,000 – that is, the historical cost of the asset was $100,000 – and its contra asset counterpart has a balance of $30,000.
- An asset source transaction increases total assets and decreases claims to assets.
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- The allowance for doubtful accounts is a contra asset because it reduces the value of the accounts receivable account on the general ledger.
Or, if they contain relatively minor balances, they may be aggregated with their paired accounts and presented as a single line item in the balance sheet. 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. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. Note that the contra liability account has a positive balance , and the liability account normally has a credit balance.
Contra accounts are worth a look
What Happens When Stock is Delisted When a company is out of compliance with an exchange, this is what can happen. Free Cash Flow The money left over after a company supports operations can be a snapshot of its financial health. Treasury Stock AccountTreasury Stock is a stock repurchased by the issuance Company from its current shareholders that remains non-retired. Moreover, it is not considered while calculating the Company’s Earnings Per Share or dividends. Notes PayableNotes Payable is a promissory note that records the borrower’s written promise to the lender for paying up a certain amount, with interest, by a specified date.