There are several examples of contra accounts, including accumulated depreciation, accumulated depletion, accumulated amortization, allowance for receivables, etc. These are all examples of contra-asset accounts, which are the Startup Bookkeeping Services Tax Preparation, Bookkeeping, and CFO Services prevalent type of contra accounts. The contra liability account is less common than the contra asset account. An example of a contra liability account is the bond discount account, which offsets the bond payable account.
When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit https://turbo-tax.org/best-law-firm-accounting-bookkeeping-services-in/ to increase bad debt expense. Therefore, contra-asset accounts differ from other accounts that have a credit balance. The contra asset account, accumulated depreciation, is always a credit balance.
Examples of Contra Accounts
The auditors aim to keep the balances at their adequate levels, but the controller might want to keep them as low as possible to reduce expenses and maximize profit levels. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com.
- They are used in case some customers won’t be able to pay the money they owe to the business.
- Contra accounts are a significant part of a company’s financial statements.
- He is the sole author of all the materials on AccountingCoach.com.
- Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset.
You’ll continue to use the contra asset account until the equipment has been completely depreciated, retired, or sold. The proper size of a contra asset account can be the subject of considerable discussion between a company controller and the company’s auditors. The auditors want to ensure that reserves are adequate, while the controller is more inclined to keep reserves low in order to increase the reported profit level. Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost. A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity).
What Is a Contra Asset?
To offset this, the allowance for doubtful accounts balance is adjusted via a credit, while the bad debt account is debited to balance out the AR account. When combined, the AR account and the allowance for doubtful accounts contra assets offer a projection of how much net cash is expected to be received from outstanding accounts. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete.
- The amount is reported on the balance sheet in the asset section immediately below accounts receivable.
- Before we start talking about the finer details, it’s important to know what is a contra asset account.
- Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000.
- If the asset account had a credit balance or the contra asset account had a debit balance, this would indicate an error in the journal entries.
- Contra asset accounts are a type of contra account that net off against asset accounts.
Contra accounts appear in the financial statements directly below their paired accounts. Sometimes the balances in the two accounts are merged for presentation purposes, so that only a net amount is presented. If the related account is an asset account, then a contra asset account https://turbo-tax.org/best-law-firm-accounting-software-in-2023/ is used to offset it with a credit balance. If the related account is a liability account, then a contra liability account is used to offset it with a debit balance. Thus, the natural balance of a contra account is always the opposite of the account with which it is paired.
An example of recording a contra asset
Therefore, contra accounts are the reverse accounts that decrease a specific account’s balance. Contra asset accounts can be used in a variety of areas, but there are three contra asset examples that you should pay close attention to. A contra account is a general ledger account with a balance that is opposite of the normal balance for that account classification.
These contras reduce the equity account and carry a debit balance. Contra equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock. The accumulated depreciation account plays a vital role in representing the accurate value of an asset in the financial statements. In essence, contra-asset accounts have a negative balance while other asset accounts have a positive balance.
