However, this account does not represent actual irrecoverable debts. The above accounts are the standard items that a company’s financial statements will include. However, there are other items as well that may not show in those financial statements.
Therefore, in the allowance method, relevant bad debt expense is recorded and accounts receivable are written off when these are considered not recoverable. Contra LiabilityA contra liability is a liability account that carries a debit balance as opposed to a credit balance. Far less common is the obsolete inventory reserve, which reduces the overall inventory value on the balance sheet. This contra account holds a reserve, similar to the allowance for doubtful accounts.
Definition of Contra Asset Account
In other words, accumulated depreciation will be $10,000 each year until the car depreciates to $0 twenty years later. The company uses the straight-line depreciation method for the car. Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values. Accumulated depreciation is the counterpart of depreciable assets. The following information is available from the financial records of X Company. If one account is debited for $100, then another account must be credited for the same amount.
The difference between an asset’s account balance and the contra account balance is known as the book value. For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure https://www.thenina.com/retail-accounting-as-a-way-to-enhance-inventory-management/ is maintained on the general ledger even as the asset’s depreciation is recorded separately. The amount is reported on the balance sheet in the asset section immediately below accounts receivable.
What are the types of Contra Asset Accounts?
This account helps all the stakeholders understand the financial numbers accurately. Accumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset’s purchase price and its carrying value on the balance sheet. The contra equity account reduces the total amount of shareholders’ equity.
Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset’s net value or book value. The definition can be expanded to include contra accounts in general. Contra accounts act like regular accounts on the balance sheet but have a unique purpose.
Contra Asset Account Example
When a company buys back its own shares from the open market, it records the transaction by debiting the treasury stock account. A company may decide to buy back its shares when management feels the stock is undervalued or because it desires to pay stock dividends to its shareholders. However, some asset accounts need a negative counterpart to reduce the balance of that account. The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. The same is true for other asset accounts like accounts receivable. Accounts receivable is rarely reported on the balance sheet at its net amount.
- The contra asset account is later reduced when the expense is recorded.
- Sometimes, the current value of a note receivable will fall compared to its face value.
- Contra liability accounts are not as popular as contra asset accounts.
- These accounts are crucial in the financial reporting process, as stated above.
- From the bank’s point of view, when a credit card is used to pay a merchant, the payment causes an increase in the amount of money the bank is owed by the cardholder.
- As mentioned, companies do not represent these accounts on the balance sheet.
It shows deductions from the revenue of a company, which results in net revenue. Also, with IFRS asking to report it in a particular way, the accountants must be updated with recent changes to how the contra assets account should appear in the books of accounts. Contra EquityA contra equity account has a debit balance instead real estate bookkeeping of a credit. The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete.
Another example of a contra account is a discount allowed account, which is the contra account to revenue account. Allowances for bad debts under receivables accounts and bad debt accounts are contra accounts to a revenue account. Taking into account the list of contra asset accounts, how would you calculate the net value of assets?