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Contra accounts act like regular accounts on the balance sheet but have a unique purpose. An example would be a contra liability account which would be debited to offset a regular liability account. When recording assets, the difference between the asset’s account balance and the contra account balance is the book value of the asset. The balance in the allowance for doubtful accounts is used to find out the dollar value of the current accounts receivable balance that is deemed uncollectible.
- The balance in a contra asset account allows the accountant, tax preparer, or other end-user to know how much to subtract from the paired asset’s value.
- Two common contra asset accounts include allowance for doubtful accounts and accumulated depreciation.
- As mentioned, CA accounts usually have a negative value which is the same as a credit balance.
- By the end of the first-year machinery, the balance will be $100,000, and accumulated depreciation will show $20,000.
- Treasury stock is a contra equity account that is entered as a negative value on the balance sheet of public companies.
- Accumulated depreciation offsets a company’s real property assets, such as buildings, equipment and machinery.
While equity accounts typically appear on the balance sheet as a credit balance, the contra equity accounts have a debit balance. This depreciation is saved in a contra asset account 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.
Why are contra asset accounts important for businesses?
If the example looks difficult, rest assured the solution is very simple. Because contra assets simply detract from the total value of the asset account, all one has to do is add up all the assets together first. Finally, take the total of depreciation and subtract it from total assets. 100% Free Tax Filing For Simple Returns Only If a ledger were to be observed in this situation, then one would see a balance of three asset debits matched up against three contra asset credits . When examining the term “contra asset account,” look no further than the root of contra to get a vague grasp of the definition.
- The credit balance in this account is amortized or allocated to Interest Income or Interest Revenue over the life of a note receivable.
- This account helps all the stakeholders understand the financial numbers accurately.
- For example, a building is acquired for $20,000, that $20,000 is recorded on the general ledger while the depreciation of the building is recorded separately.
- For example, an asset was purchased by a company for $100,000 – that is, the historical cost of the asset was $100,000 – and its contra asset counterpart has a balance of $30,000.
- Fixed assets, according to International Accounting Standard 16, are long range assets whose cost can be measured reliably.
- 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.
Original issue discounts are a type of contra liability like financing fees because they are also amortized over a loan’s term and reduce pre-tax income. The purpose of recording OID as a contra account is to quickly show the difference between the redemption price and the discounted offering price of debt. As mentioned, CA accounts are usually listed below their How to Calculate Sales Tax Methods & Examples Video & Lesson Transcript matching asset accounts, and the net values of those assets are written next to the contra accounts. The difference, which is $500, is thus listed as a discount on bonds payable and is debited to the contra liability account “discount on bonds payable.” A contra asset account is an account in the balance sheet that offsets the balance of a regular asset account.
Example Contra Account – Allowance for Doubtful Accounts
Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete. Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods. In this scenario, a write-down is recorded to the reserve for obsolete inventory. The obsolete inventory reserve account is the contra account to inventory, another asset listed on the balance sheet. Products that become unusable are recorded in this contra account to show that they are still owned by the company, but they should be excluded from the market value of inventory.
