Contra accounts act like regular accounts on the balance sheet but have a unique purpose. Contra accounts are shown in the financial statements below the paired accounts, although sometimes the balances of the two accounts are merged to a net amount for presentation purposes. 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. The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet.

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). Learn why contra accounts, when utilized correctly along with a paired account, are a crucial component of accurate accounting and financial review. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. Whenever the balance of a CA account increases (credit to the CA account), the increased amount is written off as an expense and is reported in the company’s income statement.

Contra Account Definition, Types, and Example

The projected bad debt expense is properly matched against the related sale, thereby providing a more accurate view of revenue and expenses for a specific period of time. In addition, this accounting process prevents the large swings in operating results when uncollectible accounts are written off directly as bad debt expenses. 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. Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets. In case the CA 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.

Such accounts are allowance for doubtful accounts and the accumulated depreciation account. When examining the term “contra asset account,” look no further than the root of contra to get a vague grasp of the definition. Because contra means “against,” one could quickly conclude that a contra asset account is going to be an account that goes against the regular asset account on the Balance https://www.bookstime.com/articles/contra-asset-account Sheet. In a sense, a contra asset account is a negative asset account that detracts from all of the other assets included in the balance sheet. More specifically, record the contra asset as a credit that is supposed to balance out a correlating plant asset. The situations that contra asset accounts appear are the ones dealing with Depreciation, which will be explored below.

Contra asset definition

Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. In order to balance the journal entry, a debit will be made to the bad debt expense for $4,000. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month.

For example, when the credit amount in allowance for doubtful accounts increases, it is also recorded in the bad debt expense as a debit increase. The use of contra accounts ensures the accuracy of financial accounting records, as the value of the original accounts is not directly reduced. In the event that a contra account is not utilized, it can become increasingly troublesome to determine historical costs, which makes tax preparation time-consuming and difficult. Contra accounts appear on the same financial statement as the related account. For example, an accounts receivable’s contra account is a contra asset account.

Assets

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. 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.

• The balance in the allowance for doubtful accounts is used to find out the dollar value of the current accounts receivable balance that is deemed uncollectible.
• That is because some of the bonds are issued at a discount, so this reduces the balance of their bonds payable.
• A contra asset (CA) account is an account in the balance sheet that offsets the balance of a regular asset account.
• 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.

A contra account is a general ledger account with a balance that is the opposite of another, related account that it is paired with. Assets can be anything acquired by a company or an individual in order to gain long term or short term profits. Increase in assets would be a great sign for an organization’s success. https://www.bookstime.com/ A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. Whether reported as separate lines on the financial report or as a cumulative value, the net amount of the pair of accounts is called the “net book value” of the individual asset.

Depreciation Expense Account Vs. Allowance for a Depreciation Account

Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount. For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. In accrual-basis accounting, recording the allowance for doubtful accounts at the same time as the sale improves the accuracy of financial reports.

Allowance for doubtful accounts reduce accounts receivable, while accumulated deprecation is used to reduce the value of a fixed asset. Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount. A contra liability is an account in which activity is recorded as a debit balance is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as contra asset accounts.