Quite frankly, the actual definition is not far from this estimate. In a sense, a contra asset account is a negative asset account that detracts from all of the other assets included in the balance sheet. More specifically, record the contra asset as a credit that is supposed to balance out a correlating plant asset.

• Every contra asset account on a company’s accounting records will also have a pairing account.
• The allowance method of accounting enables a company to determine the amount reasonable to be recorded in the contra account.
• However, these can cause a reduction in other balances on the statement.
• The accounting entries for accumulated depreciation are as follows.
• Therefore, in the allowance method, relevant bad debt expense is recorded and accounts receivable are written off when these are considered not recoverable.
• Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available.
• Contra asset accounts are recorded with a credit balance that decreases the balance of an asset.

Accounts receivable result in a cash inflow to an organization when they repay their dues. They are the current assets of a company expected to be realized within 12 months. In other words, accumulated depreciation will be $10,000 each year until the car depreciates to $0 twenty years later.

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An example of a contra asset account is “Accumulated Depreciation.” It is used to record the cumulative amount of depreciation expense charged against a depreciable asset over its useful life. As an asset account, the “Accumulated Depreciation” account has a credit balance, while the related asset account (e.g., “Equipment” or “Buildings”) has a debit balance. Contra assets are accounts in the general ledger—where you enter your transactions—that carry a balance used to offset the account with which it is paired.

Each of these accounts helps to offset another account on the balance sheet. For instance, the allowance for doubtful accounts reduces the net amount of accounts receivable, while the reserve for obsolete inventory does the same for inventory. Similarly, accrued liabilities reduce the total amount of current liabilities. Contra accounts appear on the same financial statement as the related account. For example, an accounts receivable’s contra account is a contra asset account. This type of account can also be called the bad debt reserve or allowance for doubtful accounts.

What Is the Benefit of Using a Contra Account?

In the books, the account of the asset would have a debit value of $100,000, and the CA account would have a credit value of $30,000. If the asset account had a credit balance or the CA account had a debit balance, this would indicate an error in the journal entries. For example, an asset was purchased by a company for $100,000 contra asset account – that is, the historical cost of the asset was $100,000 – and its contra asset counterpart has a balance of $30,000. Therefore, the asset’s net value (or the book value) will be $70,000. Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost.

The amount on the equity contra account is deducted from the value of the total number of outstanding shares listed on a company’s balance sheet. When recording assets, the difference between the asset’s account balance and the contra account balance is the book value of the asset. Contra accounts are shown in the financial statements below the paired accounts, although sometimes the balances of the two accounts are merged to a net amount for presentation purposes.

Contra Asset Account

A contra liability is an account in which activity is recorded as a debit balance is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as contra asset accounts. It is not classified as a liability since it does not represent a future obligation. Contra asset accounts are prepared so that an asset’s gross value and deductions can be shown separately.

This is done to entice customers to keep products instead of returning them. The percentage of sales method assumes that a fixed percentage of goods or services sold by a company cannot be received. 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 until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee.

Contra Asset Journal Entry Accounting

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.

The use of contra accounts ensures the accuracy of financial accounting records, as the value of the original accounts is not directly reduced. In the event that a contra account is not utilized, it can become increasingly troublesome to determine historical costs, which makes tax preparation time-consuming and difficult. Other contra account examples can be Allowance for Doubtful Accounts (also contra asset account), Bond discounts, which represent contra liability account, i.e. decrease bond payable account. The outstanding balance of a contra asset account represents a credit figure. These accounts are maintained individually and are adjusted from the corresponding asset’s balance to show the net amount of the assets in financial statements.