What is a Contra Asset Account? Definition, Types, Example, and More

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. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. When cloud billing a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense. For example, when a line item on your balance sheet presents the balance of accounts receivable, report the value of allowance of uncollectible accounts below the accounts receivable line.

• If a company has a high or fast-growing allowance as a percentage of accounts receivable, keep a close eye on it.
• They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting.
• Let’s go over how they work and what the main types are, and then finish with an example.
• By recording the offset in a separate contra account, accountants can see how much of the value in the main account has been offset.
• A second example of a contra asset account is Accumulated Depreciation.

In general, a contra account is simply a means of making sure that all aspects of transactions are accounted for in an orderly and timely manner. However, it must be understood that the concept of the contra account does not always involve a credit offsetting a debit. The basic function of this type of account is simply to be an opposite of another account. This means that an account showing a debit would be a type of contra account usually known as a contra-liability account.

What Is a Contra Liability Account

You might have seen in the balance sheet; all the accounts are shown at the net value after all the adjustments. Let’s say, the value of machinery is shown after reducing the depreciation from it. While there is nothing wrong here, there is also another way you could represent it i.e. show the full value of machinery (cost) in the balance sheet and then reduce the depreciation amount.

Discount on notes payable and discount on bonds are examples of contra liability accounts. Although contra asset accounts have credit balances, they do not appear in liabilities or equity. Usually, credit balances include items from one of those two natures. Therefore, contra asset accounts differ from other accounts that have a credit balance.

Contra Liability Account

These include accumulated depreciation, accumulated amortization, allowance for receivables, obsolete inventory, and discount on notes receivables. Examples of a contra revenue accounts include sales returns, sales discounts, and sales allowances. You debit the contra revenue accounts and credit the corresponding revenue accounts. For example, when you debit the balance in sales returns account, make sure that you offset the sales revenue account with a credit balance.

The balance sheet will show a gross fixed assets value, a contra account value for accumulated depreciation, and a net value. All three values can be useful for investors depending on what they’re looking for. A second example of a contra asset account is Accumulated Depreciation.

Examples of Contra Asset Accounts

These are all examples of contra asset accounts, which are the prevalent type of contra accounts. The contra revenue accounts commonly include sales returns, sales allowance and sale discounts. Such contra account carries a debit balance and reduces the total amount of a company’s revenue. Given that liabilities have a credit balance, ensure that all your contra liabilities accounts have debit balances.

The example for contra liability accounts includes, discount on bonds payable and discount on notes payable which carry normal debit balances. To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts. Since it is a contra asset account, this allowance account must have a credit balance (which is contrary to the debit balances found in asset accounts). The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable. Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000. A liability that is recorded as a debit balance is used to decrease the balance of a liability.

The Contra Asset Account

Periodic financial statements report the impact of the story and are used by leaders of a firm or industry to analyze performance, plan, and respond. To record contra entries, traditionally a cash book with cash and bank columns is prepared where both the aspects of the transaction will be entered in the same book which is Contra Book. In footnote 3, the company reports, «Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021.» A contra account is an account used in a general ledger to reduce the value of a related account when the two are netted together. The term “contra” means “against,” which perfectly describes the role these accounts play in your finances – they are going against the norm. Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a credit

balance.

• Now that you have understood the contra account definition, you can summarize that contra account will always have a credit balance which will offset with paired asset account.
• Accounting contra asset accounts or contra revenue accounts follow a simple double-accounting procedure to eliminate errors in financial reporting.
• The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation.
• However, the details for contra accounts usually exist on the notes to the financial statements.
• These contra revenue accounts tend to have a debit balance and are used to calculate net sales.

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. This type of reporting allows anyone analyzing the balance sheet to understand much more about the company and its assets than if they were to simply look at the net value of the depreciated asset. 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. Learn why contra accounts, when utilized correctly along with a paired account, are a crucial component of accurate accounting and financial review.

Contra asset accounts help companies to 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 doubtful debts contra account allows for future write-offs of accounts receivable. Although you have not officially written off these debts yet, you show them to be a negative balance because you don’t believe the customer will pay you. Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock. In other words, any entry which affects both cash and bank accounts is called a contra entry.