As mentioned, companies do not represent these accounts on the balance sheet. However, they will still appear on the notes to the financial statements with necessary disclosures. Instead, the existence of contra-asset accounts for companies will differ based on a company’s requirements. The proper size of a contra asset account can be the subject of considerable discussion between a company controller and the company’s auditors.
However, there are some prevalent contra-asset accounts that may exist for all companies. For example, if an account has a debit balance, a contra account will have a credit balance. Thus, netting off both will result in the final amount for the account. A contra account is an account that companies use to reduce the value of a related account.
What Is A Contra Asset Account?
When a contra asset transaction is created, the offset is a charge to the income statement, which reduces profits. There are three contra asset accounts that commonly appear in an organization’s chart of accounts. It is paired with the trade accounts https://adprun.net/crucial-accounting-tips-for-small-start-up/ receivable account, and contains a reserve for receivables that are unlikely to be paid by customers. By combining the balances in these two accounts, one can determine the net amount of receivables that the reporting entity expects to receive.
- This account offsets the balance in the respective asset account that they pair with on the balance sheet.
- It would give a more accurate picture of the company’s fixed assets.
- The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation.
- Contra accounts provide more detail to accounting figures and improve transparency in financial reporting.
- Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available.
- Companies that hold inventories for a long time may face accumulating obsolete inventory.
The most prominent of these include allowing companies to present a more accurate picture of their assets. For example, after six years, the asset’s book value on the balance sheet will be $40,000. However, it will also The Role of Financial Management in Law Firm Success have a negative accumulated depreciation of $60,000, offsetting that cost. On the other hand, accumulated depreciation is a contra-asset account. However, a contra-asset account usually has a credit or nil balance.
Contra revenue account
An account with a balance that is the opposite of the normal balance. For example, Accumulated Depreciation is a contra asset account, because its credit balance is contra to the debit balance for an asset account. This is an owner’s equity account and as such you would expect a credit balance. Other examples include (1) the allowance for doubtful accounts, (2) discount on bonds payable, (3) sales returns and allowances, and (4) sales discounts. For example net sales is gross sales minus the sales returns, the sales allowances, and the sales discounts.
Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets. In case the contra asset account is not listed in the balance sheet, it must be listed in the footnotes of the financial statement for the users to be informed. In bookkeeping, a contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit (negative) balance.
What is the importance of Contra Asset Accounts?
ABC Computers makes sales of 90,000; unfortunately, due to a fault in a product, they received returns of 2,500. The sales will still show a sales credit on the profit and loss of 90,000, but there is also a contra returns account with a debit of 2,500. The accounting entries for accumulated depreciation are as follows. If you keep a lot of inventory in stock, chances are that some of the inventory will become obsolete. This frequently happens to manufacturing companies that sell products with an expiration date since any inventory remaining in stock past the expiration date quickly becomes obsolete. We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R).