Put simply, contra accounts are used to reduce the normal accounts on the balance sheet. If the related account has a debit as the natural balance, then the contra account will record a credit. Contra LiabilityA contra liability is a liability account that carries a debit balance as opposed to a credit balance.
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Allowance for Doubtful Accounts
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. 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.
- 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.
- The amount in the accumulated depreciation account is deducted from the assets of a company, such as buildings, vehicles and equipment.
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- 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.
The provision for doubtful debts is a Contra Asset Account related to debtors. 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. Instead of debiting the asset account directly, the contra asset account balance will be credited separately.
Free Financial Statements Cheat Sheet
The contra asset account then allows recording of the value factoring in depreciation. The contra revenue account is a reduction from gross revenue, which results in net revenue. These transactions are reported in one or more contra revenue accounts, which usually have a debit balance and reduce the total amount of the company’s net revenue. Contra Asset AccountA contra asset account is an asset account with a credit balance related to one of the assets with a debit balance. When we add the balances of these two assets, we will get the net book value or carrying value of the assets having a debit balance.
- Contra accounts are important because they allow a company to follow the matching principle by recording an expense initially in the contra asset account.
- When we add the balances of these two assets, we will get the net book value or carrying value of the assets having a debit balance.
- Explain what happens to the capital account when it disposes of an asset.
- Its value indicates how much of an asset’s worth has been utilized.
- Nova Incorporated is attempting to finalize their balance sheet in terms of the net value of their assets.
Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement. The contra equity account reduces the total amount of shareholders’ equity. An allowance for doubtful accounts is a contra-asset account that reduces the total receivables reported to reflect only the amounts expected to be paid. A contra liability account is a liability account that is debited in order to offset a credit to another liability account. Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset.
How Contra Asset Accounts Work
Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples. It is prepared when there is a reduction in the value of assets due to wear and tear continuous use or when we expect that a certain percentage of accounts receivable will not be received. A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.
Accounts Receivable AccountAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. Accordingly, the value of the contra asset account will change. 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. The “Accumulated Depreciation” line item is the contra asset account reflected on the balance sheet, but often they are combined as “PP&E, net”.