Thus, the natural balance of a contra account is always the opposite of the account with which it is paired. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities includes discounts on notes or bonds payable. Contra liability accounts are not as popular as contra asset accounts.
- Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts.
- Often when a company extends goods on credit, management expects some of those customers not to pay and so anticipates writing off bad debt.
- Therefore, for these three, the debit balance actually represents a negative amount.
- This would let users of the financial statements calculate the book value of the liability.
They are usually subcategory accounts linked to an account on the balance sheet. Contra accounts are used to offset each other and reduce the gross amount. For example, a contra accumulated depreciation account can offset a fixed asset.
Whenever the balance of an account needs to be reduced in a company’s ledger, it is not always applicable to credit the account if it is an asset or debit the account if it is a liability. A contra market stock or sector is one that performs well in bear markets and underperforms in bull markets. However, they may not fare as well during bull markets when investors favor riskier stocks and sectors such as technology and basic materials. This will repeat until the machinery has been totally depreciated, sold, or retired. 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. By reflecting both accounts on the balance sheet, analysts can understand both the original price and the total decrease in value of a certain asset over time.
- To oppose the revenue made by a company, contra revenue accounts must have a debit balance.
- Allowance for doubtful accounts is netted from the accounts receivable balance.
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- Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean.
- For instance, it is common to keep the purchase price of a piece of equipment as a historical cost in the debit asset account when it comes to fixed assets.
Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement. In essence, contra-asset accounts have a negative balance while other asset accounts have a positive balance. Both of these accounts offset each other to represent a net balance on a company’s balance sheet. Contra liabilities are common in companies that sell bonds to raise capital.
Types of Contra Assets
This type of account could be called the allowance for doubtful accounts or a bad debt reserve. The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. The amount is reported on the balance sheet in the asset section immediately below accounts receivable. The net of these two figures is typically reported on a third line. When looking at the balance sheet, it is essential to understand what is being shown on the two sides – the assets debit balance and the liabilities credit balance.
This would give a more accurate picture of the company’s equity. The company would then have a contra liability account for the bonds. This would allow the company to track the amount of money that has been borrowed. The contra liability account would be used to offset the liability account on the balance sheet. The company estimates that it will not be able to collect 1,000 from its customers. The allowance for doubtful accounts is a contra asset account that is used to offset Accounts Receivable on the balance sheet.
What Is a Contra Asset?
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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. To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts. Since it is a contra asset account, this allowance account must have a credit balance (which is contrary to the debit balances found in asset accounts). The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable. Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000.
Accumulated depreciation reflects the reduction in value of a fixed asset. Overall, contra accounts are offsetting balances that are the opposite of specific accounts. There are several examples of contra accounts, including accumulated depreciation, accumulated depletion, accumulated amortization, allowance for receivables, etc. These are all examples of contra-asset accounts, which are the prevalent type of contra accounts.
For example, accumulated depreciation will go along with related assets. Although contra-asset accounts have credit balances, they do not appear in liabilities or equity. Usually, credit balances include items from one of those two natures. 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. Both the asset and the corresponding contra asset accounts must be stated clearly in the balance sheet.
Contra Account Definition, Types, and Example
As a result, utility stocks were out of favor and subsequently cheaper. This may have attracted some contra investors to start accumulating positions in these underperformers in the hopes that they will perform better in the future. These accounts might also appear on the balance sheets of the company. ADAs are used to create allowances for clients that bought the company’s goods or services but somehow failed to pay the owed amount. Stages 10 through 19 are new to this version and take place primarily in an underground facility underneath the Galuga Archipelago.
To oppose the revenue made by a company, contra revenue accounts must have a debit balance. Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks. Whenever the balance of a contra asset account increases (credit to the contra asset account), the increased amount is written off as an expense and is reported in the company’s income statement. These contras reduce the equity account and carry a debit balance.
Contra asset accounts have a credit balance as compared to a debit balance that most other types of accounts have. Before we start talking about the finer details, it’s important to know what is a contra asset account. When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense. Therefore, contra-asset accounts differ from other accounts that have a credit balance. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory.
Contra Asset Journal Entry Accounting
Contra asset accounts are reported with the related account on the same financial statement. 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. Contra asset accounts help companies record any reductions to their non-current and current assets. By doing so, they can bring their asset accounts to a more accurate position.