Contra Asset Examples, How a Contra Asset Account Works

Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent.

The allowance method of accounting enables a company to determine the amount reasonable to be recorded in the contra account. This account serves two purposes — tracking total depreciation expenses contra asset account while providing you with the accurate book value of the asset being depreciated. Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a credit
balance.

Overview of Contra Asset Account

In this way, an accumulated amortisation account offsets a related asset account (which is recorded as a debit). In this method, bad debt expense is estimated for the period and is recorded as an expense while the allowance account is credited. Accumulated depreciation accounts accumulate the depreciation expense provided so far about the corresponding asset. It is shown as a reduction to the asset account and is reversed when the asset is disposed of.

Including contra accounts on a balance sheet is important as it allows for a more transparent view of a company’s financial position. This is done by separating the decreases that have occurred in the contra account from the original transaction amount. This allows the reader to see both the current and historical book values for a particular asset or liability.

What is the importance of Contra Asset Accounts?

The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables. 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. For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account.

This helps the firms to evaluate the book value of their assets and liabilities. Contra accounts are used to help a company report the original amount of a transaction as well as reductions that may have happened. They serve an invaluable function in financial reporting that enhances transparency in accounting books.

How Contra Asset Accounts Work

Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts. In other words, contra accounts are used to reduce normal accounts on the balance sheet. Contra asset accounts provide more detailed information to financial statement users by showing both the gross and net amounts of the related asset accounts.

• Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks.
• An example of a contra asset account is “Accumulated Depreciation.” It is used to record the cumulative amount of depreciation expense charged against a depreciable asset over its useful life.
• Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset.
• Sometimes, it is important to keep the original balance of the accounts and create the contra accounts to be able to calculate the net value of the account.
• As mentioned, CA accounts usually have a negative value which is the same as a credit balance.
• These balances cannot offset asset accounts that do not relate to them.
• Asset accounts usually have a positive value which is the same as a debit balance.

Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. Depreciation is not directly reduced from the asset so that the historic value/fair value of the
asset could be presented in a balance sheet. 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. When a company gives a discount to customers in an effort to convince them to buy its goods or services, it is recorded in the discount on sales account. Bills payable or notes payable is a liability that is created when a company borrows any specific amount of money.