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What is a Contra Asset Account? Definition, Types, Example, and More

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Contra Asset Account Examples

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. Including contra revenue accounts is important in the income statement because it shows the original amount of sales the firm has made, along with any factor that has reduced that amount. Note that the contra liability account has a positive balance (a debit balance), and the liability account normally has a credit balance.

How are contra asset accounts recorded in financial statements?

The difference between an asset’s balance and the contra account asset balance is the book value. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Accumulated depreciation reflects the reduction in value of a fixed asset. The connection between contra-assets and the income statement is primarily through the periodic expense recognized, such as depreciation or amortization, which affects net income.

Contra Asset Account Examples

Can you provide examples of contra asset accounts and their purpose?

However, CSR programs encourage business leaders to consider corporate citizenship or the larger impact of the business on society when making decisions. Corporate social responsibility helps companies ensure that their operations are ethical, safe and delivering positive impact wherever possible. Through CSR initiatives, companies work to limit environmental impact, contribute to solving societal problems (such as poverty and inequality) and ensure their brand identity reflects their values.

  • A liability that is recorded as a debit balance is used to decrease the balance of a liability.
  • If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts.
  • To compensate for those potential deadbeat customers, you can use a Bad Debts account to serve as a contra for your A/R.
  • Sometimes, the current value of a note receivable will fall compared to its face value.

Accumulated Depreciation is a Contra Asset Account

Treasure stock is a good example as it carries a debit balance and decreases the overall stockholders’ equity. This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000. The most common contra equity account is called “treasury stock.” This special account decreases the number of shares outstanding in the market because the company repurchases some of the shares from its buyers. Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks. Some accountants will keep a reference handy to know if the debit increases or the credit increases an account. The normal balance of a contra account, and the debit or credit, will be the opposite of the entry and normal balance in the parent account.

Assessing Valuation Allowances

Accounting for the contrary in a business will show the normal business account value, the attached contra account underneath it, with the net revenue the business experienced below. Accumulated depreciation is considered a contra asset because it contains the cumulative total of all depreciation expense recognized on an asset to date. Rather than altering the original cost of the asset, it serves to reduce the asset’s value on the balance sheet, thus representing the asset’s declining value over its useful life. Financial statements rely heavily on the accurate reporting and use of contra assets. These considerations are vital for maintaining the integrity of financial reporting. The Reserve for Obsolete Inventory contra asset account is used to estimate and reduce the value of inventory that is no longer sellable or has diminished in value.

Debits and Credits

Contra Asset Account Examples

After each accounting period, the company records a depreciation expense of the asset. However, there are some prevalent contra-asset accounts that may exist for all companies. A contra account is an account that companies use to reduce the value of a related account. It usually nets off against related accounts and provides an opposite effect to the balance. Therefore, contra accounts are the reverse accounts that decrease a specific account’s balance.

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  • Contra equity accounts are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds.
  • You could simply adjust the parent account…but then you are missing an essential part of the story — how many patients were actually treated today for a sprain.
  • Companies that hold inventories for a long time may face accumulating obsolete inventory.
  • And when your business still has some of these outdated, unwanted, or unusable items in your inventory, you’ll want to offset the lost value of these assets in your general ledger and balance sheet.
  • 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.

In the financial statements the asset a/c would be offset against the contra asset a/c to show the net balance. In bookkeeping terms, a contra asset account refers to an account which is offset against an asset account. 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.

  • This account serves two purposes — tracking total depreciation expenses while providing you with the accurate book value of the asset being depreciated.
  • CSR encourages sustainability in business through eco-friendly practices, such as by reducing energy consumption, using renewable resources and minimizing waste.
  • But in the real world, converting all of that potential into hard cash is highly unlikely, if not impossible.
  • For stakeholders, looking at both accounts is also crucial in their decision-making process.
  • For example, a business ledger might show a $10 sale of a product, but the product was returned under warranty protection because of a failed feature.

Types of Contra Asset Accounts

A contra account is where we record events that are contrary to a general ledger parent account, also called a relating account. The balance of the contra account will offset its parent account while still preserving the value of the transactions recognized in the relating account. Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.