Contra Asset Account Definition, Examples, List of Accounts

contra asset account definition

A business might elect to separately state contra asset accounts on its balance sheet, so that the users of its financial statements can obtain additional information about the contents of these accounts. Expense accounts are technically contra equity accounts because they are linked to another equity account, revenue, and maintain an opposite balance. The expense account uses its debit balance to reduce the revenue account’s credit balance. Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements. Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. A liability recorded as a debit balance is used to decrease the balance of a liability.

Allowance for Doubtful Accounts

These accounts can be listed based on the respective asset, liability, or equity account to reduce their original balance. Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy http://www.symbolizm.ru/index.php?catid=1:latest-news&id=916:2012-09-13-07-02-59&Itemid=68&option=com_content&view=article back its stock. 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. After each accounting period, the company records a depreciation expense of the asset.

Accumulated depreciation

Contra equity accounts carry a debit balance and reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance. Contra asset accounts include allowance for doubtful accounts and the accumulated depreciation. Contra asset accounts https://free-medicine.ru/page/kazino-azino-777-i-novye-igrovye-avtomaty are recorded with a credit balance that decreases the balance of an asset. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. A key example of contra liabilities includes discounts on notes or bonds payable.

contra asset account definition

How are Contra Accounts Used and Reported?

When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. They are crucial for compliance with generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). They ensure that financial statements adhere to standardized accounting practices, enhancing the credibility and comparability of financial reports. The accounting entries for a discount on notes receivables are as follows.

contra asset account definition

A contra account is an account with a balance opposite the normal accounts in its category. Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts. In other words, contra accounts are used to reduce normal accounts on the balance sheet. 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 list of asset accounts on your general ledger and balance sheet conveys the combined, potential value of all of the tangible and intangible items that your organization possesses.
  • Examples include accumulated depreciation, sales returns and allowances, and contra equity accounts like treasury stock.
  • However, these can cause a reduction in other balances on the statement.
  • Contra accounts are used to record adjustments, reversals, or reductions in the value of assets or liabilities.

Types of contra accounts

By the end of 2nd-year, the machinery balance will still be $100,000, and accumulated depreciation will show $40,000. The netbook value of the machinery by the end of the first year will be $80,000 ($100,000-$20,000) and $60,000 ($100,000-$40,000) by the end of the second year. This method helps a third person identify what the book value was at the time of purchase and the remaining value of an asset.

  • Or, if they contain relatively minor balances, they may be aggregated with their paired accounts and presented as a single line item in the balance sheet.
  • A contra liability account is not classified as a liability, since it does not represent a future obligation.
  • Expense accounts are technically contra equity accounts because they are linked to another equity account, revenue, and maintain an opposite balance.
  • An asset account which is expected to have a credit balance (which is contrary to the normal debit balance of an asset account).
  • Contra asset accounts are recorded with a credit balance that decreases the balance of an asset.

By recording the offset in a separate contra account, accountants can see how much of the value in the main account has been offset. Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. This type of reporting allows anyone analyzing the balance sheet to understand much more about the company http://jurnal.org/articles/2015/ekon43.html 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. The accumulated depreciation account plays a vital role in representing the accurate value of an asset in the financial statements.

contra asset account definition

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