Contra Accounts Recording, Understanding, Types, Example

Inventory obsolescence is an expense account, while the allowance for obsolete inventory is a contra asset account, which aims to reduce the inventory valuation on your balance sheet. Let’s say you have a truck worth $20,000 that will last five years. If you depreciated it evenly you would take $20,000, divide it by 5 and expense $4,000 each year.

This is treated as loss during the period, also called bad debt expense. This loss is treated as an ordinary business expense and is deducted from the asset’s balance. Contra Equity Account – A contra equity account has a debit balance and decreases a standard equity account. Treasure stock is a good example as it carries a debit balance and decreases the overall stockholders’ equity. A contra account is an account with a balance opposite the normal accounts in its category.

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This depreciation is saved in a contra asset called accumulated depreciation. The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment. The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. Every contra asset account on a company’s accounting records will also have a pairing account.

To oppose the revenue made by a company, contra revenue accounts must have a debit balance. Note that in accounting, the term “book value” is also used interchangeably with net value. Contra asset accounts also provide a clear picture of the companies’ accumulation of assets. Similarly, these accounts can also be essential in various calculations.

Contra Account

The purpose of a contra asset account is to track and report reductions in the value of the related asset. As mentioned above, the primary situation in which contra asset accounts appear has to do with accumulated depreciation. Therefore, an example of a contra asset account involved with a depreciation situation seems reasonable to observe. Nova Incorporated is attempting to finalize their balance sheet in terms of the net value of their assets. At the end of the year, their assets are as follows… Nova Company valued a van at $30,000, an office building at $500,000 and office equipment at $20,000.

• If you depreciated it evenly you would take $20,000, divide it by 5 and expense $4,000 each year.
• A contra asset is paired with an asset account to reduce the value of the account without changing the historical value of the asset.
• Emilie is a Certified Accountant and Banker with Master’s in Business and 15 years of experience in finance and accounting from corporates, financial services firms – and fast growing start-ups.
• Contra asset accounts also help companies keep their general ledgers organized.
• Another example could be when a product is bought and is returned at face value because of a defect.
• The sale to the Johnson family will create a bad debt expense estimate of 10% of the amount receivable.
• The above accounts are the standard items that a company’s financial statements will include.

Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks. The revenue contra accounts Sales Returns, Discounts and Allowances are subtracted from the main Sales Revenue account to present the net balance on a company’s income statement. Regardless of that, allowance for receivables accounts will exist for all companies that have account receivable balances.

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A Fixed Asset is a Long-term Asset used by a company to create revenue. Each year of an asset’s life, another year of Depreciation Expense is recorded. The offset to the Depreciation Expense account is Accumulated Depreciation. Both the asset and the corresponding CA accounts must be stated clearly in the balance sheet. Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset’s net value or book value.

• However, they will still appear on the notes to the financial statements with necessary disclosures.
• This would let users of the financial statements calculate the book value of the liability.
• For example, an accounts receivable’s contra account is a contra asset account.
• The annual amortization of the cost of an asset is referred to as depreciation expense.
• The cost is amortized every year until the asset is expected to be used.
• If a listed company purchases its own shares from the open market, it will have to debit the treasury stock account in order to record the transaction.

Quite frankly, the actual definition is not far from this estimate. In a sense, a contra asset account is a negative asset account that detracts from all of the other assets included in the balance sheet. More specifically, record the contra asset as a credit that is supposed to balance out a correlating plant asset. The situations that contra asset accounts appear are the ones dealing with Depreciation, which will be explored below. Most accountants choose to record the depreciation over the useful life of an item in the accumulated depreciation contra asset account, which is a credit account. 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.

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These include accumulated depreciation, accumulated amortization, allowance for receivables, obsolete inventory, and discount on notes receivables. A contra asset account is an account that is paired with and offsets the balance of a related asset account. It carries a credit balance, which is the opposite of the normal debit balance of asset accounts.