Although contra-asset accounts have credit balances, they do not appear in liabilities or equity. Usually, credit balances include items from one of those two natures. In essence, contra-asset accounts have a negative balance while other asset accounts have a positive balance. T Accounts A Guide to Understanding T Accounts with Examples Both of these accounts offset each other to represent a net balance on a company’s balance sheet. However, the details for contra accounts usually exist on the notes to the financial statements. However, these can cause a reduction in other balances on the statement.
However, it will also have a negative accumulated depreciation of $60,000, offsetting that cost. On the other hand, accumulated depreciation is a contra-asset account. A company, ABC Co., purchased https://business-accounting.net/five-signs-it-s-time-to-explore-outsourced/ a depreciable asset worth $100,000. After each accounting period, the company records a depreciation expense of the asset. However, a contra-asset account usually has a credit or nil balance.
contra account definition
Both the asset and the corresponding contra asset 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. Note that in accounting, the term “book value” is also used interchangeably with net value. The contra asset account Accumulated Depreciation is deducted from the related Capital Assets to present the net balance on the parent account in a company’s balance sheet.
Examples of contra expense accounts include Purchase Returns, Purchase Discounts, and Advertising Reimbursements. Of that amount, it is estimated that 1% of that amount will become bad debt at some point in the future. This means that the $85,000 balance is overstated compared to its real value. At this point, it isn’t known which accounts will become uncollectible so the Accounts Receivable balance isn’t adjusted. Instead, an adjusting journal entry is done to record the estimated amount of bad debt. A contra account carries a balance that is opposite to the normal balance of its related main account.
Is Premium on Bonds Payable a Contra account?
Below is the asset account debit balance and accumulated depreciation account credit balance on the balance sheet. They are usually subcategory accounts linked to an account on the balance sheet. Contra accounts are used to offset each other and reduce the gross amount. For example, a contra accumulated depreciation account can offset a fixed asset.
- As mentioned above, these accounts also pair with a paired account and reduce its carrying balance.
- The purpose of a contra asset account is to store a reserve that reduces the balance in the paired account.
- The allowance for doubtful accounts is a contra asset because it reduces the value of the accounts receivable (AR) account on the general ledger.
- Consider an asset account, where the values are listed as debits, and the account itself will present a positive total.
- Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts.
- 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.
The account offsets the balance in the respective asset account that it is paired with on the balance sheet. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. A contra account relates to a specific area in the balance sheet that includes a negative balance.
Definition of a Contra Account
A contra asset is paired with an asset account to reduce the value of the account without changing the historical value of the asset. Examples of contra assets include Accumulated Depreciation and Allowance for Doubtful Accounts. Unlike an asset which has a normal debit balance, a contra asset has a normal credit balance because it works opposite of the main account. A contra asset account is an asset account with a natural credit balance. This account is paired with and offsets another asset account, so that a net balance is reported on the balance sheet.