What is a Contra Asset Account? Definition, Types, Example, and More
Sometimes, the current value of a note receivable will fall compared to its face value. This process will give rise to a contra asset account which is the discount on notes receivables. Regardless of that, allowance for receivables accounts will exist for all companies that have account receivable balances. This account helps companies present a more accurate accounts receivable balance on the financial statements. A contra equity account is an account that is used to offset another equity account on the balance sheet.
There is no reason for there to ever be a debit balance in a contra asset account; thus, a debit balance probably indicates an incorrect accounting entry. When a contra asset transaction is created, the offset is a charge to the income statement, which reduces profits. There are three contra asset accounts that commonly appear in an organization’s chart of accounts. It is paired with the trade accounts receivable account, and contains a reserve for receivables that are unlikely to be paid by customers.
How Contra Asset Accounts Work
This will repeat until the machinery has been totally depreciated, sold, or retired. Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts. This helps the firms to evaluate the book value of their assets and liabilities. ABC Computers makes sales of 90,000; unfortunately, due to a fault in a product, they received returns of 2,500.
- They are used in case some customers won’t be able to pay the money they owe to the business.
- A contra account is an account that companies use to reduce the value of a related account.
- Note that in accounting, the term “book value” is also used interchangeably with net value.
- When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value.
- Hopefully, you have a pretty clear idea of contra asset meaning—no need to ask to define contra asset accounts anymore.
Most accountants choose to record the depreciation over the useful life of an item in the accumulated depreciation contra asset account, which is a credit account. 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. Contra assets are accounts in the general ledger—where you enter your transactions—that carry a balance used to offset the account with which it is paired.
What is Contra Account?
To oppose the revenue made by a company, contra revenue accounts must have a debit balance. Contra assets may be stated in separate line items on the balance sheet. 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.
The auditors want to ensure that reserves are adequate, while the controller is more inclined to keep reserves low in order to increase the reported profit level. 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). Contra asset accounts help companies record any reductions to their non-current and current assets. By doing so, they can bring their asset accounts to a more accurate position. Contra asset accounts are necessary for companies for various reasons. The most prominent of these include allowing companies to present a more accurate picture of their assets.
A Guide to Computerised Accounting
An account with a balance that is the opposite of the normal balance. For example, Accumulated Depreciation is a contra asset account, because its credit balance is contra to the debit balance for an asset account. This is an owner’s equity account and as such you would expect a credit balance. Other examples include (1) the allowance for What is the best startup accounting software? doubtful accounts, (2) discount on bonds payable, (3) sales returns and allowances, and (4) sales discounts. For example net sales is gross sales minus the sales returns, the sales allowances, and the sales discounts. The net realizable value of the accounts receivable is the accounts receivable minus the allowance for doubtful accounts.
A Contra liability account is an account that is used to offset another liability account on the balance sheet. Contra liability accounts are typically used for bonds, https://personal-accounting.org/bookkeeping-for-nonprofits-scope-of-services/ notes payable, and other indebtedness. An allowance for doubtful accounts is a contra asset account that is used to offset Accounts Receivable on the balance sheet.