Contra Accounts Examples & How They Work

However, there is always a chance that the customer will not pay, in which case the account receivable becomes an uncollectible debt. Contra asset accounts are necessary for companies for various reasons. The most prominent of these include contra asset meaning allowing companies to present a more accurate picture of their assets. 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.

  • The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset.
  • For each debit against the inventory account, there will be a corresponding credit against the obsolete inventory contra account.
  • Contra asset accounts are reported with the related account on the same financial statement.
  • Likewise, when you pay a bill, your cash account is reduced (credited) because you’re lowering the balance.
  • Assets can become obsolete or unusable for a variety of reasons, such as getting sold or retired because of wear or inefficiency.

The reserve for obsolete inventory account is used to record the amount of inventory that has been written off as uncollectible. Contra asset accounts also provide a clear picture of the companies’ accumulation of assets. Similarly, these accounts can also be essential in various calculations. As mentioned, companies do not represent these accounts on the balance sheet. However, they will still appear on the notes to the financial statements with necessary disclosures. Regardless of that, allowance for receivables accounts will exist for all companies that have account receivable balances.

Contra Asset Account

For example, an asset was purchased by a company for $100,000 – that is, the historical cost of the asset was $100,000 – and its contra asset counterpart has a balance of $30,000. Therefore, the asset’s net value (or the book value) will be $70,000. Contra assets are important because they help businesses keep their balance sheets accurate by reducing the value of assets that may not be collected.

contra asset meaning

For most companies, the contra asset accounts will also include several types. Before understanding contra asset accounts, it is crucial to learn what contra accounts are. Allowance for doubtful accounts is netted from the accounts receivable balance. The company predicts which accounts receivable won’t be paid by customers and writes those off. When the account receivable is written off, it is added to bad debt expense on the income statement and placed in the contra account.

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Contra asset accounts are reported with the related account on the same financial statement. In the financial statements the asset a/c would be offset against the contra asset a/c to show the net balance. At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset. Note that the asset account https://personal-accounting.org/unamortized-bond-discount-definition/ balance represents the purchase price of the asset in question, also known as its historical cost. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value.

  • This account only relates to a company’s intangible assets rather than tangible.
  • The difference between an asset’s balance and the contra account asset balance is the book value.
  • Other examples include (1) the allowance for doubtful accounts, (2) discount on bonds payable, (3) sales returns and allowances, and (4) sales discounts.
  • They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting.

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. Accumulated depreciation is the most prevalent type of contra asset account.

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