What is a contra asset account?

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. 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 . When examining the term “contra asset account,” look no further than the root of contra to get a vague grasp of the definition. Because contra means “against,” one could quickly conclude that a contra asset account is going to be an account that goes against the regular asset account on the Balance Sheet.

This type of account could be called the allowance for doubtful accounts or bad debt reserve. The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. In the books, the account of the asset would have a debit value of $100,000, and the CA account would have a credit value of $30,000. If the asset account had a credit balance or the CA account had a debit balance, this would indicate an error in the journal entries. Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost. The definition can be expanded to include contra accounts in general.

Contra Asset Account Definition

It is shown as a reduction to the asset account and is reversed when the asset is disposed of. If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts. A contra account is used in order to better portray the relationship between certain debits and credits within the overall financial structure of an entity. A contra account can be used to remedy an error, to track depreciation of an asset, or to register payments that are not collectible. Accrued assets are assets, such as interest receivable or accounts receivable, that have not been recorded by the end of an accounting period.

• In other words, accumulated depreciation will be $10,000 each year until the car depreciates to $0 twenty years later.
• These assets are expected to provide future economic benefits for many accounting periods.
• Whenever the balance of a CA account increases , the increased amount is written off as an expense and is reported in the company’s income statement.
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• This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000.

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 construction bookkeeping that are unlikely to be paid by customers. By combining the balances in these two accounts, one can determine the net amount of receivables that the reporting entity expects to receive.

List of Components of Contra Asset Account

INVESTMENT BANKING RESOURCESLearn the foundation of Investment banking, financial modeling, valuations and more. So, an organization looking for a robust accounting process must move to this reporting for better understanding. Are prepared for various parties; some of them might not be accounting versed; they help identify the reduction in total value. It is only prudent to show the reduction or reserve in a separate account, and at any point, it gives us the netbook value explaining what the actual cost was and how much of that has been depreciated. It also helps create reserves, and later any change in the expected number can be adjusted through allowances and reserves. Despite being classified as a liability, it functions more like an asset because benefits are provided to the company.

• Contra asset accounts provide business owners with the true value of certain asset accounts.
• For her businesses, Nora is responsible for finances, marketing, operations, and fundraising.
• Bad Debts expense is increased and Accounts Receivable is decreased at the end of the period to recognize bad debts under the allowance method.
• This allows the reader to see both the current and historical book values for a particular asset or liability.

They are useful in preserving the historical value in the main account while presenting a write-down or decrease in a separate contra account that nets to the current book value. Contra accounts serve an invaluable function in financial reporting that enhances transparency in accounting books. Also, with IFRS asking to report it in a particular way, the accountants must be updated with recent changes to how the contra assets account should appear in the books of accounts.

Contra asset definition

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 adjusted trial balance lists the account balances segregated by assets and liabilities. An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts. If a company uses the contra account Accumulated Amortization, this https://www.scoopearth.com/the-importance-of-retail-accounting-in-improving-inventory-management/ account will typically be shown on the balance sheet. Contra asset accounts are prepared so that a specific reverse effect on the corresponding asset could be recorded. Accumulated depreciation accounts accumulate the depreciation expense provided so far about the corresponding asset.

What are examples of contra accounts?

The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline. However, that $1.4 billion is used to reduce the balance of gross accounts receivable. Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount. For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. 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. Both the asset and the corresponding CA accounts must be stated clearly in the balance sheet.