For example, if an account has a debit balance, a contra account will have a credit balance. Thus, netting off both will result in the final amount for the account. The net of the asset and its related contra asset account is referred to as the asset’s book value or carrying value. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value.
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- Therefore, contra-asset accounts differ from other accounts that have a credit balance.
- The difference between an asset’s balance and the contra account asset balance is the book value.
- However, the details for contra accounts usually exist on the notes to the financial statements.
- Hence, the book value of the liability will be the credit balance of the liability account minus the debit balance of its contra liability counterpart.
- The stock that a corporation buys back is called treasury stock.
This account only relates to a company’s intangible assets rather than tangible. As evident from the table below, each contra account has a parent account whose normal balance is often exactly opposite of the normal balance of the relevant contra account. Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a credit
balance. Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts. This helps the firms to evaluate the book value of their assets and liabilities.
Types of Contra Assets
If the related account is a liability account, then a contra liability account is used to offset it with a debit balance. Thus, the natural balance of a contra account is always the opposite of the account with which it is paired. 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 includes discounts on notes or bonds payable.
Companies that hold inventories for a long time may face accumulating obsolete inventory. The accounting entries for accumulated depreciation are as follows. If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting.
And it’s particularly important to track and manage these assets. Obsolete inventory accounts are very important in dealing with this, especially when many smaller businesses struggle with obsolete assets regularly. Contra asset accounts are asset accounts where the balance is a credit balance.
Hopefully, you have a pretty clear idea of contra asset meaning—no need to ask to define contra asset accounts anymore. Including contra asset accounts on your balance sheets can be hugely beneficial for your business. Reserve for obsolete Accounting for Startups The Ultimate Startup Accounting Guide 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.
Contra Account Examples
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.” 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. Notes receivables are promissory notes that include a promise from a borrower to repay a lender. For companies, these represent receivables from various parties.
Equipment is a long-term asset account that has a debit balance. 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. Machinery, physical space, equipment, vehicles, etc., are some examples of common fixed assets. Ultimately, an accumulated depreciation contra asset account helps the company reduce the gross amount of all the fixed assets within a company.
Allowance for Doubtful Accounts
In response, the firm should decrease its accounts receivable and revenue balances. That is done by crediting accounts receivable by $100 and debiting the contra revenue account sales returns and allowances https://www.wave-accounting.net/donations-for-nonprofits-and-institutions/ for $100. Hence, the company will have gross revenue or net sales equal to $9,900. Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets.
Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. A debit will be made to the bad debt expense for $4,000 to balance the journal entry. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month.