Definition of contra asset account in Accounting

Examples of contra asset accounts include accumulated depreciation, obsolete inventory reserves, and allowance for doubtful accounts. The owner’s equity is calculated by subtracting liabilities from the business’s assets. Contra equity accounts reduce the total amount of the owner’s, or shareholders’, equity. While equity accounts typically appear on the balance sheet as a credit balance, the contra equity accounts have a debit balance. Contra assets are an important bookkeeping concept that helps balance a business’s books. In this article, we look closely at contra assets and the different types of contra accounts you may see on financial statements.

• Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts.
• Because contra means “against,” one could quickly conclude that a contra asset account is going to be an account that goes against the regular asset account on the Balance Sheet.
• When a company sells its products or services to customers on credit, the company records the amount sold in its accounts receivable account.
• A company’s financial accounts will usually have three types of items.
• Prior to zeroing out their account balances, these accounts should reflect the updated depreciation expense computed up to the disposal sale date.
• Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement.

Discount on bonds payable is a result of a bond issued for less than the face value of the bond. Companies must bring the balance of the discount on bonds payable account to zero over the life of the bond, which is accomplished through amortization. The amount recorded in the discount on bonds payable account is amortized to interest expense over the life of the bond. Amortization of the discount on bonds payable account decreases its balance and increases the balance in the interest expense account. Contra asset accounts are a type of contra account that net off against asset accounts.

Contra Accounts

The provision for doubtful debts is a contra asset account related to debtors. Balance Sheet AccountsA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based https://www.icsid.org/business/managing-cash-flow-in-construction-tips-from-accounting-professionals/ on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete.

However, there are other items as well that may not show in those financial statements. For example, if the balance of accumulated depreciation increases from $20,000 to $50,000, this means that the depreciation expense amounts to $30,000, which will be listed in the retail accounting income statement. A contra asset account is an account in the balance sheet that offsets the balance of a regular 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.

Basic types of 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. Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts. This helps the firms to evaluate the book value of their assets and liabilities. Consider what would happen if you have sales on credit that you reasonably expect will not be paid.

• A debit balance is a net amount often calculated as debit minus credit in the General Ledger after recording every transaction.
• Contra asset accounts are a type of contra account that net off against asset accounts.
• By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount.
• Hence, the book value of the liability will be the credit balance of the liability account minus the debit balance of its contra liability counterpart.
• Contra accounts that are combined into the asset value and not shown as separate line items are noted in the footnotes of the balance sheet.