By reflecting both accounts on the balance sheet, analysts can understand both the original price and the total decrease in value of a certain asset over time. The proper size of a contra asset account can be the subject of considerable discussion between a company controller and the company’s auditors. The auditors want to ensure that reserves are adequate, while the controller is more inclined to keep reserves low in order to increase the reported profit level. The balance owed on a credit card can be treated either as a liability or a negative asset, known as a “contra” asset.

Contra accounts serve an invaluable function in financial reporting that enhances transparency in accounting books. When the amount recorded in the contra revenue accounts is subtracted from the amount of gross revenue, it equals the net revenue of a company. In case a customer returns a product, the company will record the financial activity under the sales return account. When recording assets, the difference between the asset’s account balance and the contra account balance is the book value of the asset. An allowance for doubtful accounts is a contra-asset account that reduces the total receivables reported to reflect only the amounts expected to be paid. Contra accounts are crucial in reducing the balance on the paired account.

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This account helps all the stakeholders understand the financial numbers accurately. Accumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset’s purchase price and its carrying value on the balance sheet. Contra assets are credit accounts that carry their own values that when combined with the value of the paired account, informs the balance sheet.

A key example of contra liabilities include discount on notes or bonds payable. Contra liability accounts are not as popular as contra asset accounts. Overall, contra accounts are offsetting balances that are the opposite of specific accounts. There are several examples of contra accounts, including accumulated depreciation, accumulated depletion, accumulated amortization, allowance for receivables, etc. These are all examples of contra asset accounts, which are the prevalent type of contra accounts.

What Is a Contra Asset?

This account helps companies present a more accurate accounts receivable balance on the financial statements. 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.

The following entry should be done in accordance with your revenue and reporting cycles , but at a minimum, annually. Any company that owns intangible assets such as software, patent, etc., will maintain an accumulated amortization account. Similar to depreciation, this account plays a significant role in representing the book value of a company’s assets. Accumulated amortization is an account similar to accumulated depreciation. This account only relates to a company’s intangible assets rather than tangible. Suppose a company has recorded $100,000 in accounts receivable (A/R) and $10,000 in the allowance for doubtful accounts (i.e. 10% of A/R is estimated as uncollectible).

Contra Account Definition, Types, and Example

However, a contra equity account is a debit balance that reduces the balances reported on equity accounts. For example, treasury stock is a common type of contra equity account. A contra account reduces the reported balance for the paired account.

ClientThe company who sells their invoices to a factoring company. Add each credit card to your list of Bank Accounts making sure to mark the Checkbook column. The interest revenue will be received on January 15 following the company’s year-end. Current assets are not depreciated because of their short-term life.

XA stands for Contra-Asset Account

However, they will still appear on the notes to the financial statements with necessary disclosures. The use of contra accounts ensures the accuracy of financial accounting records, as the value of the original accounts is not directly reduced. In the event that a contra account is not utilized, it can become increasingly troublesome to determine what does contra asset mean historical costs, which makes tax preparation time-consuming and difficult. Overall, contra asset accounts can improve your accounting system, particularly cash flow projections. 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.

• Usually, companies add to the accumulated depreciation account after every accounting period.
• These balances cannot offset asset accounts that do not relate to them.
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• A contra liability is an account in which activity is recorded as a debit balance is used to decrease the balance of a liability.

Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming. Contra accounts reduce the balance on a paired account in a specific area in the balance sheet. However, these accounts do not appear on the financial statement separately. Contra accounts relate to all areas in the balance sheet, including assets, liabilities, and equity.

The allowance, sometimes called a bad debt reserve, represents management’s estimate of the amount of accounts receivable that will not be paid by customers. If actual experience differs, then management adjusts its estimation methodology to bring the reserve more into alignment with actual results. A contra asset account is an account that opposes the balances of other asset accounts.

Contra asset accounts are necessary for companies for various reasons. The most prominent of these include allowing companies to present a more accurate picture of their assets. Allowance for receivables is an account that companies maintain to record possible bad debts. However, this account does not represent actual irrecoverable debts. A contra account is an account that companies use to reduce the value of a related account. It usually nets off against related accounts and provides an opposite effect to the balance.