Contra Account Definition, Types, and Example

contra asset account definition

Therefore, these companies must maintain an obsolete inventory reserve account to net off any unusable stock from the account. This requirement also comes from the accounting standard for inventories. However, there are some prevalent contra-asset accounts that may exist for all companies. This account offsets the balance in the respective asset account that they pair with on the balance sheet. For example, if an account has a debit balance, a contra account will have a credit balance.

  • Offsetting the asset account with its respective contra asset account shows the net balance of that asset.
  • It also helps create reserves, and later any change in the expected number can be adjusted through allowances and reserves.
  • Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available.
  • The treasury stock account is debited when a company buys back its shares from the open market.
  • A contra account is a general ledger account with a balance that is opposite of the normal balance for that account classification.

Contra liability account example

By stating this information separately in a contra asset account, a user of financial information can see the extent to which a paired asset should be reduced. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete. Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods.

Allowance for Receivables

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. Accumulated amortization is an account similar to accumulated depreciation. This account only relates to a company’s intangible assets rather than tangible. If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts.

Contra accounts definition

Usually, companies add to the accumulated depreciation account after every accounting period. Therefore, contra-asset accounts differ from other accounts that have a credit balance. Inventory obsolescence is an expense account, while the allowance for obsolete inventory is a contra asset account, which aims to reduce the inventory valuation on your balance sheet. 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.

contra asset account definition

Contra Account: Definition, Types & Examples

  • Instead, the existence of contra-asset accounts for companies will differ based on a company’s requirements.
  • Rather, it is an adjunct account or a valuation account that is added to the face value of the bonds to arrive at the carrying value (or book value) of the bonds on the balance sheet.
  • Also, with IFRS (International Financial Reporting Standards) 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.
  • Specifically, it is contra to shareholders’ equity because it decreases the total shareholders’ equity on the balance sheet.
  • However, the “Allowance for Doubtful Accounts” (or “Allowance for Uncollectible Accounts”) is a contra account related to the concept of bad debts.

Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset. Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts. Since it is a contra asset account, this allowance account must have a credit balance (which is contrary to the debit balances found in asset accounts). The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable.

Understanding Contra Liability Accounts

The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount. The most common contra type, contra assets, records the loss in value of any asset accounts listed in your general ledger. And by comparing these contras against their corresponding parent accounts, you can better understand the actual value of the assets retained by your business.

Benefits of Contra Accounts

contra asset account definition

As we have seen in the above discussion, how reporting contra assets accounts helps in a better understanding of the financial statements of any organization. So, an organization http://businesslearning.ru/NewsAM/NewsAMShow.asp?ID=222748 looking for a robust accounting process must move to this reporting for better understanding. Companies that issue bonds are likely to use contra liability accounts.

contra asset account definition

However, it’s important to keep in mind that you can create any contra account you want to more clearly describe your business — this is not an exhaustive or definitive list. Examples include accumulated depreciation, sales returns and allowances, and contra equity accounts like treasury stock. The contra revenue account https://pmrgid.com/video/displayresults/0?pattern=finance&rpp=0&sort=0&ep=&ex= 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. An asset that is recorded as a credit balance is used to decrease the balance of an asset.

The credit balance in this account is amortized or allocated to Interest Income or Interest Revenue over the life of a note receivable. At Invoiced, we provide a suite of solutions that work together to make managing your invoicing, accounts https://addinfo.com.ua/ru/luchshie-igrovye-avtomaty-ot-populyarnyh-razrabotchikov/ receivable, and accounts payable seamless and easy. To convert your invoice management efforts to an electronic format that can easily share data with other financial systems, businesses can leverage Invoiced’s E-invoice Network.

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