Contra Account Definition + Journal Entry Examples

what is a contra asset

In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000. If the asset account had a credit balance or the contra asset account had a debit balance, this would indicate an error in the journal entries. Note that in accounting, the term “book value” is also used interchangeably with net value. Allowance for doubtful accounts (ADA) is a contra asset account used to create an allowance for customers who are not expected to pay the money owed for purchased goods or services. The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables. Contra assets may be stated in separate line items on the balance sheet.

A contra account carries a balance that is opposite to the normal balance of its related main account. Contra asset accounts also help companies keep their general ledgers organized. By recording reductions in a separate account, companies can get better insights into their actual accounts. Contra asset accounts also provide a clear picture of the companies’ accumulation of assets.

Is a Contra Balance Negative or Positive?

For example, a company may know that its 10-year average of bad debt is 2.4%. Therefore, it can assign this fixed percentage to its total accounts receivable balance since more often than not, it will approximately be close to this amount. The company must be aware of outliers or special circumstances that may have unfairly impacted that 2.4% calculation. Regardless of that, allowance for receivables accounts will exist for all companies that have account receivable balances.

The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. Contra liability accounts are less commonly used than contra asset accounts. Contra liability accounts are mainly used by corporations that issue bonds frequently.

Definition and Examples of Contra Assets

This is important for accurate financial reporting and compliance with... A contra expense account is an account used to reduce the amount of an expense without changing the balance in the main expense account. Examples of contra expense accounts include Purchase Returns, Purchase Discounts, and Advertising Reimbursements. A delivery van is purchased by a business to use in delivering product and picking up materials.

  • 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.
  • However, it will also have a negative accumulated depreciation of $60,000, offsetting that cost.
  • In this scenario, a write-down is recorded to the reserve for obsolete inventory.
  • Contra accounts act like regular accounts on the balance sheet but have a unique purpose.

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 help companies record any reductions to their non-current and current assets. By doing so, they can bring their asset accounts to a more accurate position. After each accounting period, the company records a depreciation expense of the asset. Contra accounts are a significant part of a company’s financial statements. These accounts can significantly reduce balances on the balance sheet.

How to Record a Contra Account

Note that if a company believes it may recover a portion of a balance, it can write off a portion of the account. Companies that hold inventories for a long time may face accumulating obsolete inventory. The accounting entries for accumulated amortization are as follows. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting.

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