Contra Asset Examples, How a Contra Asset Account Works

Contra Liability a/c is not used as frequently as http://www.kozma.ru/archives/articles/kazakov-en.htms. It is not classified as a liability since it does not represent a future obligation. Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset.

If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. Last, for contra revenue https://photointerview.ru/byloe/reguljarnyj-prosmotr-televizora-ukorachivaet-zhizn.html accounts there are sales discounts, sales allowances, or sales returns. These contra revenue accounts tend to have a debit balance and are used to calculate net sales.

Understanding a Contra Account

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. In either case, the net amount of the pair of accounts is referred to as the book value of the asset account in question. When a contra asset account is not stated separately in the balance sheet, it may be worthwhile to disclose the amount in the accompanying footnotes, where readers can readily see it.

The allowance for doubtful accounts is a contra asset because it reduces the value of the accounts receivable (AR) account on the general ledger. Often when a company extends goods on credit, management expects some of those customers not to pay and so anticipates writing off bad debt. Note that the contra liability account has a positive balance (a debit balance), and the liability account normally has a credit balance. 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. In the books, the account of the asset would have a debit value of $100,000, and the http://annandale.gg/news/ would have a credit value of $30,000.

What is a Contra Asset Account?

The difference between an asset’s account balance and the contra account balance is known as the book value. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account. The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold. 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. Allowance for receivables is an account that companies maintain to record possible bad debts.

• The size of the reserve also reveals the amount of bad debt that the company expects to experience from the current set of receivables.
• Instead of debiting the asset account directly, the contra asset account balance will be credited (reduced) separately.
• It can help companies see the complete picture of their income and expenses and their equity or net worth.
• The allowance for doubtful accounts is used to reduce the net income by the estimated amount of uncollected receivables.
• For instance, it is common to keep the purchase price of a piece of equipment as a historical cost in the debit asset account when it comes to fixed assets.

The contra asset account, accumulated depreciation, is always a credit balance. This balance is used to offset the value of the asset being depreciated, so as of September 1, your $8,000 asset now has a book value of $7,866.67. If you offer credit terms to your customers, you probably know that not all of them will pay. Creating this contra asset account builds in a safeguard against overstating your accounts receivable balance.

Example Contra Account – Allowance for Doubtful Accounts

Most accountants choose to record the depreciation over the useful life of an item in the accumulated depreciation contra asset account, which is a credit account. The balance sheet would show the piece of equipment at its historical cost, then subtract the accumulated depreciation to reflect the accurate value of the asset. 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.

Osman has a generalist industry focus on lower middle market growth equity and buyout transactions. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.