Contra Asset Examples, How a Contra Asset Account Works
Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University. Home Depot also devotes footnote 4 to its share repurchase program and reports that the company is authorized by its board to repurchase $20 billion in shares. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation.
However, these vehicles have experienced significant wear and tear in the intervening years. And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand. When researching companies, the financial statement is a great place to start. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent.
In other words, the contra liability account is used to adjust the book value of an asset or liability. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance. These less-frequent contra accounts come into play when you need to account for changes in the outstanding liabilities for your business.
- Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.
- Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory.
- It works to provide a clear picture of the net balance by presenting the difference between the two accounts.
- The contra equity account treasury stock is reported right on the balance sheet.
Similarly, accumulated depreciation accounts reduce the value of the fixed assets you report on your financial statements. A liability that is recorded as a debit balance is used to decrease the balance of a liability. It is not classified as a liability https://accounting-services.net/ since it does not represent a future obligation. 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.
Doubtful Debts and Contra Assets
The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable. It also shows the carrying (net) amount of $19,000, which you report to your firm’s balance sheet. Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable. They are used in case some customers won’t be able to pay the money they owe to the business. In response, the firm should decrease its accounts receivable and revenue balances. That is done by crediting accounts receivable by $100 and debiting the contra revenue account sales returns and allowances for $100.
Taking a closer look at contra asset accounts
Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Offsetting the asset account with its respective contra asset account shows the net balance of that asset. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. These contra revenue accounts tend to have a debit balance and are used to calculate net sales. If you’re still using manual accounting systems, you’ll need to do a bit more work by recording your accumulated depreciation expense in your general ledger while also reporting it on your balance sheet as a contra asset account. For example, when a line item on your balance sheet presents the balance of accounts receivable, report the value of allowance of uncollectible accounts below the accounts receivable line.
AccountingTools
A doubtful debts contra account allows for future write-offs of accounts receivable. Although you have not officially written off these debts yet, you show them to be a negative balance because you don’t believe the customer will pay you. The reason you show a contra asset on a balance sheet is so you can see the overall net balance of a particular asset and to give investors a more accurate look into your company’s financial activity. A bank-to-bank transfer involves journal entries that debit the bank account from which funds are transferred and credit the receiving bank account. 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 income statement. Contra accounts act like regular accounts on the balance sheet but have a unique purpose.
In reality, the actual number of company discounts came closer to $5 thousand. Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers. The amount is not reported, and the net sales amount is reported on the income statement. Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock. Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a creditbalance. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.
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. So rather than adjusting your Inventory account, you would update its contra account — Obsolete Inventory. There is almost always a story behind data; a clarification or historical insight that changes the meaning behind raw figures.
Given that liabilities have a credit balance, ensure that all your contra liabilities accounts have debit balances. Discount on notes payable and discount on bonds are examples of contra liability accounts. Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements.
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. Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost. Consider a business that offers an early payment discount to its customers, cutting their invoiced total by 3% if they pay within 1 week of invoicing. If every single buyer had taken advantage of the early payment discount, the company would have provided roughly $10 thousand in discounts during that same timeframe.
Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. A less common example of a contra asset account is Discount on Notes Receivable. The credit balance in this account is amortized or allocated to Interest Income or Interest Revenue over the life of a note receivable. Asset accounts always maintain a debit balance, so anytime that you increase the value of an asset, such as when you deposit customer payments or invoice a customer, that asset account is debited or increased. Likewise, when you pay a bill, your cash account is reduced (credited) because you’re lowering the balance.
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. Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset. 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. The list of asset accounts on your general ledger and balance sheet conveys the combined, potential value of all of the tangible and intangible items that your organization possesses. But in the real world, converting all of that potential into hard cash is highly unlikely, if not impossible. Instead, you need to record this value gap, and a contra asset account serves that purpose.
In other words, contra revenue is a deduction from gross revenue, which results in net revenue. Accounting software can simplify the management of and reporting from your ledger. With the appropriate contra account level of automation integration in your chosen tool, you can pull the relevant values into these individual accounts directly from invoices, credit agreements, and other documentation.
Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock. The main reason is to make the remaining shares more valuable, as their prices are expected to rise after the stock buyback. Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values. Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at Scale Venture Partners, focused on technology. He’s currently a VP at KCK Group, the private equity arm of a middle eastern family office. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions.