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Contra Asset Account Definition, List Examples with Accounting Entry

Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance. An example of this is accumulated depreciation. This account decreases the fixed asset carrying balance. Another contra asset account is Allowance for Doubtful Accounts. This account appears next to the current asset Accounts Receivable.

In accounting, assets are things of value that your business owns. Your bank account, the inventory you currently stock, the equipment you purchase, and your accounts receivable balance are all considered asset accounts. Which statement concerning the Accumulated Depreciation account is false? C) The account balance is needed in determining the book value of the related asset. Examples of contra accounts include allowance for doubtful accounts, reserve for obsolete inventory, and accrued liabilities.

Presentation of Contra Assets

The allowance for doubtful accounts is a contra asset because it reduces the value of the accounts receivable 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. Contra contra asset account accounts are used to reduce the value of the original account directly to keep financial accounting records clean. For example, assume a company made $10,000 in sales on credit. This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000.

An example would be a contra liability account which would be debited to offset a regular liability account. 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.

Contra Asset Journal Entry Accounting

The natural balance in a contra asset account is a credit balance, as opposed to the natural debit balance in all other asset accounts. There is no reason for there to ever be a debit balance in a contra asset account; thus, a debit balance probably indicates an incorrect accounting entry. When a contra asset transaction is created, the offset is a charge to the income statement, which reduces profits. By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company. Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset. Contra liability accounts are less commonly used than contra asset accounts.

• As mentioned, CA accounts usually have a negative value which is the same as a credit balance.
• An example of this is a discount on bonds payable.
• The main reason is to make the remaining shares more valuable, as their prices are expected to rise after the stock buyback.
• Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable.
• They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting.
• This account shows the balance of depreciation that has been charged to date in respect of assets.
• It estimates that 2% of all receivables will not be collected.

For example, let’s say your accounts receivable balance is currently $11,500, but you’re not entirely sure that you’ll be able to collect the entire balance due. Contra asset accounts are used to track everything from depreciation expenses to returned merchandise. Learn what a contra asset is and how you can use these accounts in your small business. In double-entry accounting, a credit to an asset account will represent an increase in the asset account balance, and a debit will represent a decrease in the asset account balance. A contra asset account is an asset account with a credit balance, the balance of the contra asset account is reduced from the… 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.

Contra Account Definition in Accounting

Contra liability accounts are mainly used by corporations that issue bonds frequently. That is because some of the bonds are issued at a discount, so this reduces the balance of their bonds payable. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. This allows for the easy determination of historical costs. This is particularly important for contra asset accounts.