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. Accumulated Depreciation is a contra asset that pairs with Fixed Assets. Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset. A Fixed Asset is a Long-term Asset used by a company to create revenue.
These contra revenue accounts tend to have a debit balance and are used to calculate net sales. 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. How to Start Your Own Bookkeeping Business: Essential Tips 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 second example of a contra asset account is Accumulated Depreciation. This type of contra asset accounts is used for recording the depreciation within the timeframe of a fixed asset.
The account Allowance for Doubtful Account is credited when the account Bad Debts Expense is debited under the allowance method. The use of Allowance for Doubtful Accounts allows us to see in Accounts Receivable the total amount that the company has a right to collect from its credit customers. The credit balance in the account Allowance for Doubtful Accounts tells us how much of the debit balance in Accounts Receivable is unlikely to be collected. Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement. Contra revenue accounts typically offset revenue accounts in a firm’s income statement. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance.
It’s highly likely that your books will benefit from this process in terms of clarity, transparency, and the amount of time it takes to do accounting. 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. This account appears next to the current asset Accounts Receivable.
A contra asset is a negative asset account that offsets the asset account with which it is paired. The purpose of a contra asset account is to store a reserve that reduces the balance in the paired account. 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. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete.
This article will give you the definition of contra in accounting, talk about different contra accounts, and give examples. At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset. Although they all aim at reducing the balance of some type of account, it is useful to have some general foundational knowledge of the different types of accounts.
To offset this, the allowance for doubtful accounts balance is adjusted via a credit, while the bad debt account is debited to balance out the AR account. When combined, the AR account and the allowance for doubtful accounts contra assets offer a projection of how much net cash is expected to be received New Business Accounting Checklist for Startups from outstanding accounts. 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. Instead of debiting the asset account directly, the contra asset account balance will be credited (reduced) separately.
For example, a contra accumulated depreciation account can offset a fixed asset. A less common example of a contra asset account is Discount on Notes Receivable. The credit balance in this account is amortized https://simple-accounting.org/nonprofit-accounting-a-guide-to-basics-and-best/ or allocated to Interest Income or Interest Revenue over the life of a note receivable. Far less common is the obsolete inventory reserve, which reduces the overall inventory value on the balance sheet.
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