This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms. Most accounts receivable would just be the time between purchase and credit card settlement. If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative. Contra asset accounts also provide a clear picture of the companies’ accumulation of 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 net of the asset and its related contra asset account is referred to as the asset’s book value or carrying value. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value.
Contra equity and contra revenue
By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company. Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset. Contra asset accounts are hugely beneficial for nearly all types of companies. A contra asset account example is an accumulated depreciation account that will help the company track and offset fixed assets.
It represents all the depreciation related to an asset or the company’s overall assets. Usually, companies add to the accumulated depreciation account after every accounting period. Every contra asset account on a company’s accounting records will also have a pairing account.
Contra Account Examples
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. If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts. 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 separately.
Setting up contra asset accounts is easy with accounting software. A bit more work will be required on the accountant’s or account analyst’s behalf if books are done manually without any software. The company’s Accounting For Startups The Entrepreneur’s Guide contra asset account will record unusable or obsolete assets. Assets can become obsolete or unusable for a variety of reasons, such as getting sold or retired because of wear or inefficiency.
What Is a Contra Asset?
In accounting, assets are things of value that your business owns. Your bank account, the inventory you currently stock, the equipment you purchase, and your accounts receivable balance are all considered asset accounts. For example, it is not very useful to show the PPE https://business-accounting.net/role-of-financial-management-in-law-firm-success/ cost account and the related accumulated depreciation account separately on the balance sheet. We are better off subtracting the accumulated depreciation account (the contra account) from PPE cost account (the parent account) to arrive at the net balance of the PPE.
- Accumulated amortization is an account similar to accumulated depreciation.
- The proper size of a contra asset account can be the subject of considerable discussion between a company controller and the company’s auditors.
- Contra asset accounts also help companies keep their general ledgers organized.
- A contra asset account is an account in the balance sheet that offsets the balance of a regular asset account.
- This contra-asset account reduces the accounts receivable balance on the balance sheet to its net realizable value.
If the related account is a liability account, then a contra liability account is used to offset it with a debit balance. 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 asset account definition
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. A contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as contra asset accounts.
That is because some of the bonds are issued at a discount, so this reduces the balance of their bonds payable. Even small businesses benefit immensely from contra asset accounts. Obsolete inventory or obsolete inventory reserves is another popular type of contra asset accounts.