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Treasure stock is a good example as it carries a debit balance and decreases the overall stockholders’ equity. 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. A contra-asset account is an account that opposes the balances of other asset accounts.

A customer returned $100 worth of items, claiming them to be defective. Contra accounts are crucial in reducing the balance on the paired account. However, contra accounts allow them to track these transactions separately. Furthermore, these accounts are also crucial in allowing companies to record the original values for the paired 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.

Contra asset definition

As mentioned, a company will usually have debit balances in its asset accounts. In either case, using these accounts can help you better manage depreciation expense, keep your accounts receivable balance accurate, and properly dispose of and account for obsolete inventory. A less common example of a contra asset account is Discount on Notes Receivable. The credit balance in this account is amortized or allocated to Interest Income or Interest Revenue over the life of a note receivable. This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000.

• These are all examples of contra-asset accounts, which are the prevalent type of contra accounts.
• A contra-asset account is an account that opposes the balances of other asset accounts.
• Hence, the book value of the liability will be the credit balance of the liability account minus the debit balance of its contra liability counterpart.
• However, these vehicles have experienced significant wear and tear in the intervening years.

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. 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.

Liability Contra Account

That is done by crediting accounts receivable by $100 and debiting the contra revenue account sales returns and allowances for $100. Hence, the company https://intuit-payroll.org/florida-state-tax-2023-rates-who-has-to-pay/ will have gross revenue or net sales equal to $9,900. To oppose the revenue made by a company, contra revenue accounts must have a debit balance.

• Contra asset accounts can be used in a variety of areas, but there are three contra asset examples that you should pay close attention to.
• The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset.
• The list of asset accounts on your general ledger and balance sheet conveys the combined, potential value of all of the tangible and intangible items that your organization possesses.
• 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.
• Contra Liability a/c is not used as frequently as contra asset accounts.

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. Revenue is shown on the income statement as a credit, it is the amount of revenue a business earns in a period. It might be important for a business to track the full cost of sales less contras Basic Accounting Tips for Churches and Nonprofits to see the full picture. Asset accounts always maintain a debit balance, so anytime that you increase the value of an asset, such as when you deposit customer payments or invoice a customer, that asset account is debited or increased. Likewise, when you pay a bill, your cash account is reduced (credited) because you’re lowering the balance.

Contra Equity Account

Therefore, contra-asset accounts differ from other accounts that have a credit balance. The following are examples of commonly-used contra asset accounts you could create to better understand your business financials. However, it’s important to keep in mind that you can create any contra account you want to more clearly describe your business — this is not an exhaustive or definitive list. Inventory obsolescence is an expense account, while the allowance for obsolete inventory is a contra asset account, which aims to reduce the inventory valuation on your balance sheet. This account appears next to the current asset Accounts Receivable. The account Allowance for Doubtful Account is credited when the account Bad Debts Expense is debited under the allowance method.

• A company receives rebates for advertising it does on behalf of brands it carries in its stores.
• Both the asset and the corresponding contra asset accounts must be stated clearly in the balance sheet.
• These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances.
• Namely, within a ledger, each account is intended to contain transactions and balances of a similar type only.
• 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.

Companies record the opposite entries for that area in the related contra account. Consequently, these accounts offset the balances related to the original account. Contra accounts link or connect to a paired account which they impact directly. 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.

How to Record a Contra Account

This question is asked by many students, accountants, and professionals. This article will give you the definition of contra in accounting, talk about different contra accounts, and give examples. This account serves two purposes — tracking How Long Are Checks Good For? total depreciation expenses while providing you with the accurate book value of the asset being depreciated. If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts.