Contra Asset Examples, How a Contra Asset Account Works

Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts reduce accounts receivable, while accumulated https://online-accounting.net/ deprecation is used to reduce the value of a fixed asset. Assets, or what is owned by the business, are recorded in a company’s general ledger and appear on the balance sheet.

As an example, if the value of machinery is $500,000 at the end of the year, this is the net value of the machinery. This will be shown using a contra account called an accumulated depreciation account. Without this account, the user may not know about the adjustments made to the value of machinery.

Types of Contra Accounts

When a corporation buys back its shares that have been previously issued, it is recorded as a Treasury Stock. When deciding to go to college, you give up time and money to get a degree or the benefits…

• They are used in case some customers won’t be able to pay the money they owe to the business.
• 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.
• They are also accessible via the general ledger, trial balance, and some cash flow statements.
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• 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.

A contra account is an account whose balance is the opposite of a corresponding account. In finance, a contra account reduces the value of related or corresponding account. It offsets the balance of the related account, which means when the corresponding account is positive, a contra account will be negative. Although a bond discount is a contra liability account, it cannot be considered as a liability since no future obligation can be expected from it. A contra liability account is the lesser known type of a contra account. The most known type of a contra asset account is the Accumulated Depreciation which reduces the amount of Fixed Assets. As the name indicates, sales return accounts are maintained to record the return of goods by customers, if any.

How to Calculate Units of Activity or Units of Production Depreciation

Upon receipt of the invoice, the customer paid in cash immediately. Sales Allowances – Sales Allowances are given when goods sold have slight defects when delivered to the customer. The following information is available from the financial records of X Company. In Managerial or Cost Accounting, costs are first identified and then assigned to the part of the business that incurs the cost, the part of the business that makes those costs necessary. Nora O’Malley covers small business finance and entrepreneurship topics for The Balance. Along with her writing work, Nora is an entrepreneur and consultant who opened an all-tap wine bar in New York’s East Village dubbed Lois and owns a sophisticated snack food business Aida. For her businesses, Nora is responsible for finances, marketing, operations, and fundraising.

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. Above all, the two most common examples of contra accounts are allowance for bad debts and allowance for depreciation. The sales discount and sales return are Contra revenue accounts, as it decreases the sales revenue. In the example above, before returning goods by a customer sales were $50,000, after reducing $10,000 now sales revenue balance is $40,000. Moreover, the natural balance of sales revenue is credit in the balance sheet.

Accumulated depreciation is what type of account?- Video

Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes. For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded What Other Types of Contra Accounts Are Recorded on the Balance Sheet? separately. It is clear evident in the chart above that contra account is following the rule of going in reverse. Either it is asset, liability, or equity what the account do is to have an opposite balance. Accumulated depreciation is not an asset because balances stored in the account are not something that will produce economic value to the business over multiple reporting periods. Accumulated depreciation actually represents the amount of economic value that has been consumed in the past.

• Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory.
• The percentage of sales method assumes that a fixed percentage of goods or services sold by a company cannot be received.
• The contra account is used to report the correct assets while preserving the transactions and balance of the relating account.
• The company uses the straight-line depreciation method for the car.
• Assets, or what is owned by the business, are recorded in a company’s general ledger and appear on the balance sheet.

Contra asset accounts appear as a credit balance and reduce the value of assets. Contra liabilities appear as a debit balance and reduce the amount a company owes. Contra equity accounts reduce shareholders’ equity and contra revenues account for a reduction of collected income. Using contra accounts can allow financial statement users to prepare annual reports and calculate net values more efficiently and are an important part of the accounting toolkit.