Contra Account financial definition of Contra Account

This is treated as loss during the period, also called bad debt expense. This loss is treated as an ordinary business expense and is deducted from the asset’s balance. Contra Equity Account – A contra equity account has a debit balance and decreases a standard equity account. Treasure stock is a good https://accounting-services.net/ example as it carries a debit balance and decreases the overall stockholders’ equity. Revenue AccountRevenue accounts are those that report the business’s income and thus have credit balances. Revenue from sales, revenue from rental income, revenue from interest income, are it’s common examples.

Accumulated depreciation accounts accumulate the depreciation expense provided so far about the corresponding asset. It is shown as a reduction to the asset account and is reversed when the asset is disposed of.

Contra Asset

Accounts may also be assigned a unique account number by which the account can be identified. Account numbers may be structured to suit the needs of an organization, such as digit/s representing a division of the company, a department, the type of account, etc. The first digit might, for example, signify the type of account (asset, liability, etc.).

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. By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount. Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset. When a good is sold on credit, the amount receivable from customers is shown under the debtor’s balance sheet balance.

Allowance for doubtful debts accounts

Whether reported as separate lines on the financial report or as a cumulative value, the net amount of the pair of accounts is called the “net book value” of the individual asset. Property, plant, and equipment (PP&E) are long-term assets vital to business operations and not easily converted into cash.

To record a revenue contra account, the company must be able to determine how much the contra account is. In the balance sheet, the accounts receivable would be reflected after adjusting this allowance account. If it is the first year of operation, there is no outstanding balance in the allowance account. Financial What is a Contra Asset Account – Definition and Example Statements Of Any OrganizationFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period . Accounting EntryAccounting Entry is a summary of all the business transactions in the accounting books, including the debit & credit entry.

Types of contra asset accounts

Each individual’s unique needs should be considered when deciding on chosen products. For example, a company has determined that 5% of their accounts receivable in the amount of $15,000 will become uncollectible. For accounting purposes and convenience of taxation, firms show the historical cost of accounts instead of directly showing the net value. Depreciation is not directly reduced from the asset so that the historic value/fair value of the asset could be presented in a balance sheet. This results in compliance with the accrual concept while reflecting on an accurate accounts receivable balance. The accounting entries for allowance for receivables are as follows.

For example, accumulated amortization is a contra asset account that reduces the balance for intangible assets. Contra asset accounts are the most common type of contra account. The two common contra liability accounts, discount on bonds payable and discount on notes payable, carry normal debit balances. The discount on bonds payable represents the difference between the amount of cash a company receives when issuing a bond and the value of the bond at maturity. Notes payable represents a liability created when a company signs a written agreement to borrow a specific amount of money. The lender may offer the company a discount if it repays the note early. The discount on notes payable reduces the total amount of the note to reflect the discount given by the lender.

How is a Contra Account Used?

Accounts receivable is rarely reported on the balance sheet at its net amount. Instead, it is reported at its full amount with an allowance for bad debts listed below it. Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off. Obsolete inventory refers to a company’s products or goods that have become obsolete, or unusable, during routine use and operations. This type of contra asset account may generally be debited expenses, followed by a credit to the company’s contra asset account for recording unusable inventory. Similarly, a business may also write off these types of expenses from its financial records if the inventory has been completely phased out. The contra asset account can also be combined with a current inventory account, allowing a financial analyst to determine the current market value of the company’s inventory.

• Instead, the existence of contra asset accounts for companies will differ based on a company’s requirements.
• Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean.
• Its purpose includes selling the asset to another business unit, merger and acquisition.
• 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.