The proper size of a contra asset account can be the subject of considerable discussion between a company controller and the company’s auditors. 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. The amount of this reserve is typically based on the company’s historical loss experience for each reserve. While accumulated depreciation is the most common contra asset account, the following also may apply, depending on the company. A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger.
- 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.
- These are all examples of contra-asset accounts, which are the prevalent type of contra accounts.
- Specifically, it is contra to shareholders’ equity because it decreases the total shareholders’ equity on the balance sheet.
- Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete.
Most accounts receivable would just be the time between purchase and credit card settlement. If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative. On the other hand, if you’re looking at a high-flying growth stock that reports new revenue growth records each quarter but has a massive allowance for doubtful accounts, there may be problems ahead. A contra account carries a balance that is opposite to the normal balance of its related main account. Contra asset accounts are necessary for companies for various reasons. The most prominent of these include allowing companies to present a more accurate picture of their assets.
How are contra accounts recorded?
This account is paired with and offsets another asset account, so that a net balance is reported on the balance sheet. The contra liability account is less common than the contra asset account. An example of a contra liability account is the bond discount account, which offsets the bond payable account. A contra liability account is not classified as a liability, since it does not represent a future obligation.
- Contra accounts are confusing at first, but, with a little study, understanding them becomes second nature.
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- At the same time, our Accounts Receivable Automation software and Accounts Payable Automation software makes tracking, managing, and processing crucial assets and liabilities — and their contras — easier than ever before.
- Expense accounts are technically contra equity accounts because they are linked to another equity account, revenue, and maintain an opposite balance.
- A business called Show-Fleur offers private driving tours of local botanical gardens — all from the comfort of high-end limousines.
Tricky Question: Is Unearned Revenue a Contra Account?
This account helps companies present a more accurate accounts receivable balance on the financial statements. Similarly, allowance for receivables will pair with accounts receivable balances. These balances cannot offset asset accounts that do not relate to them.
Taking a closer look at contra asset accounts
Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance. 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.
Why Use a Contra Account?
We’ll need to dig into the footnotes to find out what the contra accounts are. 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. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet.
Accounts Receivable is an asset account that represents the amount of money due to a business for goods or services that have been delivered or used but not yet paid for by customers. Contra asset accounts also provide a clear picture of the companies’ accumulation of assets. Similarly, these accounts can also be essential in various calculations. Any company that owns intangible assets such as software, patents, etc., will maintain an accumulated amortization account. Similar to depreciation, this account plays a significant role in representing the book value of a company’s assets.
Contra asset accounts are a type of contra account that net off against asset accounts. These include accumulated depreciation, accumulated amortization, allowance for receivables, obsolete inventory, and discount on contra asset notes receivables. Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement. Examples of revenue contra accounts are Sales Discounts, Returns and Allowances. Expense accounts are technically contra equity accounts because they are linked to another equity account, revenue, and maintain an opposite balance.
A Contra Asset Account is an asset account having a credit balance that is related to one of the assets with a debit balance. When we add the balances of two of these assets together, it reflects the net book value or carrying value of the debit balance assets. 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. As your business acquires new assets (e.g., machinery, office equipment, vehicles), you record the initial purchase value in your Fixed Asset account. But these items don’t retain that initial value; if liquidated, they would likely be sold at a loss. In order to record this ongoing value drop, you would use a corresponding contra account — an Asset Depreciation account. There is almost always a story behind data; a clarification or historical insight that changes the meaning behind raw figures. In a report, layering on that additional context can be easy, but in a general ledger, you have few options for conveying nuance and subtlety.
So rather than adjusting your Inventory account, you would update its contra account — Obsolete Inventory. In its general ledger, the business will want to capture its gross sales figures and the actual value of the discount. Contra liabilities are common in companies that sell bonds to raise capital.
In footnote 3, the company reports, “Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021.” Notes receivables are promissory notes that include a promise from a borrower to repay a lender. Accounting software can simplify the management of and reporting from your ledger. With the appropriate level of automation integration in your chosen tool, you can pull the relevant values into these individual accounts directly from invoices, credit agreements, and other documentation.
Because contra asset accounts are used so frequently, it’s worth spending a little bit more time on them here, including common subtypes. This depreciation is saved in a contra asset account called accumulated depreciation. The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment. The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. It carries a credit balance and is linked to the fixed asset account, which carries a debit balance.