What is a contra asset account?

Therefore, a contra asset can be regarded as a negative asset account. Offsetting the asset account with its respective contra asset account shows the net balance of that asset. Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable. They are used in case some customers won’t be able to pay the money they owe to the business.

A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. The allowance method of accounting allows a company to contra asset account estimate what amount is reasonable to book into the contra account. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting.

Allowance for doubtful accounts

Although they all aim at reducing the balance of some type of account, it is useful to have some general foundational knowledge of the different types of accounts. Accumulated depreciation is a contra asset account. Whenever depreciation is charged to the profit and loss statement, the accumulated depreciation account is credited. This account shows the balance of depreciation that has been charged to date in respect of assets. A contra account is an account that is used to offset another account.

Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. Accounting EntryAccounting Entry is a summary of all the business transactions in the accounting books, including the debit & credit entry.

What is the importance of Contra Asset Accounts?

This type is paired with the asset account, which allows a business to record the original price or value of the asset at time of purchase. The contra asset account then allows recording of the value factoring in depreciation. Contra assets may be stated in separate line items on the balance sheet. Or, if they contain relatively minor balances, they may be aggregated with their paired accounts and presented as a single line item in the balance sheet. In either case, the net amount of the pair of accounts is referred to as the book value of the asset account in question.

• The sales allowance shows the discounts given to customers when returning the product.
• Contra liability accounts are special accounts in the liabilities section of the balance sheet.
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• The basis of property is increased by capital returns and decreased by capital expenditures.

The balance sheet would show the piece of equipment at its historical cost, then subtract the accumulated depreciation to reflect the accurate value of the asset. 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 construction bookkeeping expense. Balance sheet, users of financial statements can learn more about the assets of a company. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.

Definition of Contra Asset Account

If a company purchases equipment with cash, how does this affect the accounting equation? State whether the assets, liabilities, and owner’s equity increase, decrease, or stay the same. In double-entry accounting, a credit to an asset account will represent an increase in the asset account balance, and a debit will represent a decrease in the asset account balance. Accordingly, the value of the contra asset account will change. Also, with IFRS asking to report it in a particular way, the accountants must be updated with recent changes to how the contra assets account should appear in the books of accounts.