Definition of contra asset account in Accounting

Unlike a regular disposal of an asset, where the asset is abandoned and written off the accounting records, an asset disposal sale involves a receipt of cash or other proceeds. In accounting, notes receivables are accounts to keep track of accrued assets that have been earned but not yet received. Accounts receivable is a control account that must have the same balance as the combined balance of every individual account in the accounts receivable subsidiary ledger. Assets Due To RevaluationAssets revaluation is an adjustment made in the carrying value of the fixed asset, either upwards or downwards, depending upon the fair market value of the fixed asset. Its purpose includes selling the asset to another business unit, merger and acquisition.

• In a sense, a contra asset account is a negative asset account that detracts from all of the other assets included in the balance sheet.
• Bad Debts expense is increased and Accounts Receivable is decreased at the end of the period to recognize bad debts under the allowance method.
• A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment.
• Contra revenue accounts reduce revenue accounts and have a debit balance.
• Apple breaks out its amount of property, plant, and equipment (PP&E) and then lists its accumulated deprecation that reduces the PP&E figure.
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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.

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The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value. Reserve for obsolete inventory is a contra asset account that is used to reduce the net value of a company’s balance sheet. With each debited to your expense account related to useless inventory, you’ll create a corresponding credit in the reserve for obsolete inventory asset account. A contra asset account is an asset account with a natural credit balance.

Accumulated depreciation actually represents the amount of economic value that has been consumed in the past. 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.

What Is a Contra Account?

The use of Allowance for Doubtful Accounts allows us to see in Accounts Receivable the total amount that the company has a right to collect from its credit customers. The credit balance in the account Allowance for Doubtful Accounts tells us how much of the debit balance in Accounts Receivable is unlikely to be collected. Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Therefore, a contra asset can be regarded as a negative asset account. Offsetting the asset account with its respective contra asset account shows the net balance of that asset.

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. Quite frankly, the actual definition is not far from this estimate. In a sense, a contra asset account is a negative asset account that detracts from all of the other assets included in the balance sheet.

What Other Types of Contra Accounts Are Recorded on the Balance Sheet?

Another contra asset listed on the balance sheet is accumulated depreciation. This reduces the amount of the carrying value of a company’s fixed asset to account for the wear and tear over the asset’s useful life. Fixed assets are often listed on the balance sheet as property, plant and equipment. The accumulated depreciation account appears on the balance sheet as a credit and is a reduction from the total amount listed for fixed assets.

Contra liabilities reduce liability accounts and carry a debit balance. Contra equity accounts carry a debit balance reduce equity accounts.

Accounting EntryAccounting Entry is a summary of all the business transactions in the accounting books, including the debit & credit entry. It has 3 major types, i.e., Transaction Entry, Adjusting Entry, & Closing Entry. Debit BalanceIn a General Ledger, when the total credit entries are less than the total number of debit entries, it refers to a debit balance. A debit balance is a net amount often calculated as debit minus credit in the General Ledger after recording every transaction. We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R). A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment.

Here, accounts receivable are decreased in the period when bad debt expense is incurred. However, bad debt expense can arise to the sales made in earlier periods.

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Nora O’Malley covers small business finance and entrepreneurship topics for The Balance. Along with her writing work, Nora is an entrepreneur and consultant who opened an all-tap wine bar in New York’s East Village dubbed Lois and owns a sophisticated snack food business Aida. For her businesses, Nora is responsible for finances, marketing, operations, and fundraising.

https://bookkeeping-reviews.com/ revenue accounts reduce revenue accounts and have a debit balance. There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities include discount on notes or bonds payable. Contra liability accounts are not as popular as contra asset accounts. For example, a contra account to accounts receivable, often called allowance for doubtful accounts, is a contra asset account.