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 asset accounts are a type of contra account that net off against asset accounts. These include accumulated depreciation, accumulated amortization, allowance for receivables, obsolete inventory, and discount on notes receivables. A contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as contra asset accounts. It is not classified as a liability since it does not represent a future obligation.

What are the Different Types of Contra Accounts?

The amount is reported on the balance sheet in the asset section immediately below accounts receivable. 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. Contra liability accounts are special accounts in the liabilities section of the balance sheet. This would let users of the financial statements calculate the book value of the liability. Both the asset and the corresponding contra asset accounts must be stated clearly in the balance sheet.

Do Contra Accounts Have Debit or Credit Balances?

Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. Master accounting topics that pose a particular challenge to finance professionals.

1. Learn why contra accounts, when utilized correctly along with a paired account, are a crucial component of accurate accounting and financial review.
2. This credit card is not just good – it’s so exceptional that our experts use it personally.
3. Notes receivables are promissory notes that include a promise from a borrower to repay a lender.
4. Contra asset accounts are a type of contra account that net off against asset accounts.
5. That is done by crediting accounts receivable by $100 and debiting the contra revenue account sales returns and allowances for $100.

Allowance for doubtful accounts

Every contra asset account on a company’s accounting records will also have a pairing account. For example, accumulated depreciation will go along with related assets. To oppose the revenue made by a company, contra revenue accounts must have a debit balance. Sometimes, both accounts can be written in a single line if they don't represent a large portion of the assets. In case the contra asset account is not listed in the balance sheet, it must be listed in the footnotes of the financial statement for the users to be informed.

What are the Benefits of Factoring Your Account Receivable?

Treasury stock represents shares of a company’s own stock that it has repurchased from shareholders but not retired. Instead of increasing assets or decreasing liabilities (as would be typical when what are different types of standards under standard costing spending cash), buying treasury stock reduces shareholders’ equity. Specifically, it is contra to shareholders’ equity because it decreases the total shareholders’ equity on the balance sheet.

Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset's net value or book value. In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000. 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. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete. Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods.

For example, if an account has a debit balance, a contra account will have a credit balance. Thus, netting off both will result in the final amount for the account. You’ll continue to use the contra asset account until the equipment has been completely depreciated, retired, or sold.

Similar to depreciation, this account plays a significant role in representing the book value of a company’s assets. Accumulated amortization is an account similar to accumulated depreciation. This account only relates to a company’s intangible assets rather than tangible. Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a creditbalance. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.

Contra asset accounts are necessary for companies for various reasons. The most prominent of these include allowing companies to present a more accurate picture of their assets. Instead, the existence of contra-asset accounts for companies will differ based on a company’s requirements.

For each debit against the inventory account, there will be a corresponding credit against the obsolete inventory contra account. A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger. 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 https://www.quick-bookkeeping.net/ to ensure that reserves are adequate, while the controller is more inclined to keep reserves low in order to increase the reported profit level. The amount of this reserve is typically based on the company’s historical loss experience for each reserve. 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.

If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming. The account Allowance for Doubtful Account is credited when the account Bad Debts Expense is debited under the allowance method. The use of Allowance for Doubtful Accounts allows us to see in Accounts Receivable the total amount that the company has a right to collect from its credit customers. The credit balance in the account Allowance for Doubtful Accounts tells us how much of the debit balance in Accounts Receivable is unlikely to be collected. 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.

There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, https://www.quick-bookkeeping.net/consignment-sale-definition/ carrying a credit balance. Contra liabilities reduce liability accounts and carry a debit balance. Contra equity accounts carry a debit balance and reduce equity accounts.

Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. Therefore, contra-asset accounts differ from other accounts that have a credit balance. The contra asset account, accumulated depreciation, is always a credit balance. This balance is used to offset the value of the asset being depreciated, 6 ways to write off your car expenses so as of September 1, your $8,000 asset now has a book value of $7,866.67. Your bank account, the inventory you currently stock, the equipment you purchase, and your accounts receivable balance are all considered asset accounts. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.