The contra asset account then allows recording of the value factoring in depreciation. Including contra revenue accounts is important in the income statement because it shows the original amount of sales the firm has made, along with any factor that has reduced that amount. Allowance for Doubtful retail accounting Accounts contra asset account decreases the value of accounts receivable by an estimate of uncollectible receivables to show their net realizable value on a balance sheet. You don’t have to, yet even a small business will benefit by using the contra asset account for accounts receivable.
- A contra account balances the numbers from two or more accounts that are compared on the balance sheet.
- Contra revenue accounts reduce revenue accounts and have a debit balance.
- A debit entry in a contra asset account is unnatural and most likely indicates an incorrect journal entry.
- The amount is reported on the balance sheet in the asset section immediately below accounts receivable.
- Accumulated depletion is similar to accumulated depreciation but takes into account the total amount depleted from natural resources.
- Far less common is the obsolete inventory reserve, which reduces the overall inventory value on the balance sheet.
The credit balance in this account is amortized or allocated to Interest Income or Interest Revenue over the life of a note receivable. Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. This account offsets the balance in the respective asset account that they pair with on the balance sheet. As mentioned, CA accounts are usually listed below their matching asset accounts, and the net values of those assets are written next to the contra accounts. This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000. A customer returned $100 worth of items, claiming them to be defective.
What is the importance of Contra Asset Accounts?
In accounting terminology, it refers to recognition of the reduced or zero value of an asset no longer in use. In accounting, intangible assets are defined as non-monetary assets that cannot be seen, touched or physically measured. That calculated amount is credited to either the appropriate intangible asset account or accumulated amortization account .
A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet. Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt. 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. They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting. 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.
Overview of contra accounts
The accounting rules applicable to contra asset accounts are exactly opposite to asset accounts. Contra asset accounts are credited when these are increased and debited when these are decreased. There are generally two contra asset accounts used by companies that are an allowance for doubtful debts account and an accumulated depreciation account. Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement. Contra revenue accounts typically offset revenue accounts in a firm’s income statement. As mentioned above, the primary situation in which contra asset accounts appear has to do with accumulated depreciation.
Purchases of oil and gas wells, timber, and fossil and mineral deposits are recorded on a company’s balance sheet as natural resources. These are physically extracted and only replaced by a natural process. Accumulated depletion accounts for the reduction of value in a natural resource. For example, as a company https://time.news/how-can-retail-accounting-streamline-your-inventory-management/ extracts oil from an oil well over a period of time, the value of the oil well declines. The amount of the decline is recorded in the accumulated depletion account. This type is paired with the asset account, which allows a business to record the original price or value of the asset at time of purchase.
Examples of contra asset account in the following topics:
By recording reductions in a separate account, companies can get better insights into their actual accounts. Similarly, it allows companies to retrieve original account balances without complicated calculations. For stakeholders, looking at both accounts is also crucial in their decision-making process. Contra asset accounts help companies to record any reductions to their non-current and current assets. By doing so, they can bring their asset accounts to a more accurate position. Allowance for doubtful debt is a contra account against which bad debts are charged.
What is a contra asset account used for?
A contra asset is a negative asset account that offsets the asset account with which it is paired. The purpose of a contra asset account is to store a reserve that reduces the balance in the paired account.
For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. A contra account is a balance sheet account that is used to offset a related asset, liability, or equity account. Contra accounts are used to ensure the proper valuation of these items is reflected on the balance sheet. Contra asset accounts also help companies keep their general ledgers organized.