When a contra asset account is not stated separately in the balance sheet, it may be worthwhile to disclose the amount in the accompanying footnotes, where readers can readily see it. Note that the contra liability account has a positive balance (a debit balance), and the liability account normally has a credit balance. 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.
In other words, accumulated depreciation will be $10,000 each year until the car depreciates to $0 twenty years later. The auditors aim to keep the balances at their adequate levels, but the controller might want to keep them as low as possible to reduce expenses and maximize profit levels. This improvement in the accounting details and transparency is good for any business in multiple ways. These accounts might also appear on the balance sheets of the company. ADAs are used to create allowances for clients that bought the company’s goods or services but somehow failed to pay the owed amount. 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).
How Contra Asset Accounts Work
In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000. If the asset account had a credit balance or the contra asset account had a debit balance, this would indicate an error in the journal entries. Note that in accounting, the term “book value” is also used interchangeably with net value.
The size of the reserve also reveals the amount of bad debt that the company expects to experience from the current set of receivables. The natural balance in a contra asset account is a credit balance, as opposed to the natural debit balance in all other asset accounts. There is no reason for there to ever be a debit balance in a contra asset account; thus, a debit balance probably indicates an incorrect accounting entry.
What are Contra Accounts?
Ultimately, an accumulated depreciation contra asset account helps the company reduce the gross amount of all the fixed assets within a company. Contra liability, equity, and revenue accounts have natural debit balances. What is Legal Accounting Software For Lawyers These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount.
- Contra asset accounts have a credit balance as compared to a debit balance that most other types of accounts have.
- The auditors aim to keep the balances at their adequate levels, but the controller might want to keep them as low as possible to reduce expenses and maximize profit levels.
- Contra assets are accounts in the general ledger—where you enter your transactions—that carry a balance used to offset the account with which it is paired.
- Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods.
Accumulated depreciation reflects the reduction in value of a fixed asset. Even small businesses benefit immensely from contra asset accounts. Obsolete inventory or obsolete inventory reserves is another popular type of contra asset accounts. This type of accounts involves the products or goods of a company that is now unusable or obsolete. 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.
The Contra Equity Account
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. https://accounting-services.net/how-to-do-bookkeeping-for-startup/ 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.
By stating this information separately in a contra asset account, a user of financial information can see the extent to which a paired asset should be reduced. Including contra revenue accounts is important in the income statement because it shows the original amount of sales the firm has made, along with any factor that has reduced that amount. Contra liability accounts are special accounts in the liabilities section of the balance sheet. They aim to reduce the balance of some related liability accounts. This would let users of the financial statements calculate the book value of the liability.