What is a Contra Asset Account? Definition, Types, Example, and More

In a given month, the company generates $100 thousand in gross sales but provides a total of only about $2 thousand in discounts that month. If every rejection letter for grant request​ single buyer had taken advantage of the early payment discount, the company would have provided roughly $5 thousand in discounts during that same timeframe. In reality, the actual number of company discounts came closer to $2 thousand. Optimizing your handle on contra accounts doesn’t end with just understanding them; it’s about mastering the tools and techniques to manage them effectively. Enrich your expertise by diving into online courses that dissect advanced accounting concepts, many of which come with coveted CPE credits to boot.

• By the end of the first-year machinery, the balance will be $100,000, and accumulated depreciation will show $20,000.
• As your business acquires new assets (e.g., machinery, office equipment, vehicles), you record the initial purchase value in your Fixed Asset account.
• This type of reporting allows anyone analyzing the balance sheet to understand much more about the company and its assets than if they were to simply look at the net value of the depreciated asset.
• The accumulated depreciation account increases yearly, reducing the asset’s book value.
• Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts.
• By viewing these accounts — the parent and contra — in tandem, business owners can gain broader insights, preserve the historical figures stored in the parent account, and make accommodations for any relevant changes.
• 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.

What is a Contra Asset?

By properly managing depletion accounting, companies in these industries can better track and allocate the costs and value of their natural resources. This also ensures accurate financial statements, which is essential for meeting regulatory requirements and maintaining the trust of stakeholders. Every contra asset account on a company’s accounting records will also have a pairing account. 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.

• The allowance for doubtful accounts is used to reduce the net income by the estimated amount of uncollected receivables.
• Angela is certified in Xero, QuickBooks, and FreeAgent accounting software.
• This adjustment reduces net accounts receivable on the balance sheet and increases expenses on the income statement, providing a comprehensive view of the company’s financial health.
• In bookkeeping terms, a contra asset account refers to an account which is offset against an asset account.
• Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete.
• This creates a direct link between the reduction of fixed asset value on the balance sheet and the recognition of expenses on the income statement.
• An allowance for doubtful accounts is a contra asset account that is used to offset Accounts Receivable on the balance sheet.

What Are Examples of a Contra Asset Account?

Below is the asset account debit balance and accumulated depreciation account credit balance on the balance sheet. The Allowance for Doubtful Accounts represents a contra asset account that reduces accounts receivable. This account estimates the is your business income subject to self portion of receivables that a company believes will not be collected, indicating a more accurate value of potential revenue. Home Depot reports net receivables and net property and equipment, implying that both are reduced by contra assets. We’ll need to dig into the footnotes to find out what the contra accounts are. To properly account for this scenario in their books, the company must record the gross sales figure (which is the total sales revenue) and the value of the discount on early payments.

What are Contra Accounts?

Such accurate record-keeping is vital for maintaining the integrity of your financial reports. Contra revenue accounts are the dedicated detectives tracking down all the subtractions from a company’s gross revenue. These accounts keep an eagle eye on sales returns, allowances, and discounts, ensuring you’re not overestimating your income. By subtracting these amounts from the total sales, what you’re left with is net revenue— the revenue that’s truly earned and likely to stay in the company’s pocket. Maintaining contra revenue accounts empowers you to maintain healthier and more realistic expectations of financial outcomes—no rose-tinted glasses here.

Example of a Contra Asset Account

Instead, it is reported at its full amount with an allowance for bad debts listed below it. Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off. It is prepared when there is a reduction in the value of assets due to wear and tear continuous use or when we expect that a certain percentage of accounts receivable will not be received. Fixed assets like plants & equipment are depreciated every year, and this balance is transferred to the accumulated depreciation account.

Recording Contra Assets

Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. 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. In bookkeeping, a contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit (negative) balance. The account offsets the balance in the respective asset account that it is paired with on the balance sheet.

A Contra Asset Account is an asset account having a credit balance that is related to one of the assets with a debit balance. When we add purchases journal format calculation and example the balances of two of these assets together, it reflects the net book value or carrying value of the debit balance assets. However, that $1.4 billion is used to reduce the balance of gross accounts receivable. Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount.