The allowance for doubtful accounts is used to reduce the net income by the estimated amount of uncollected receivables. This account helps to give a more accurate picture of the company’s financial position. This question is asked by many students, accountants, and professionals. This article will give you the definition of contra in accounting, talk about different contra accounts, and give examples. Contra asset accounts also help companies keep their general ledgers organized.
The Allowance for Doubtful Accounts carries a credit balance that reduces the total amount of accounts receivable to show the amount that the company expects to collect. Most accountants choose to record the depreciation over the useful life of an item in the accumulated depreciation contra asset account, which is a credit account. The balance sheet would show the piece of equipment at its historical cost, then subtract the accumulated depreciation to reflect the accurate value of the asset. Contra equity accounts are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds. Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances. However, some asset accounts need a negative counterpart to reduce the balance of that account.
What Is the Benefit of Using a Contra Account?
This type of accounts involves the products or goods of a company that is now unusable or obsolete. A contra asset account is an asset account with Best Practice To Hire or Outsource for Nonprofit Accounting 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.
Any company that owns intangible assets such as software, patents, 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. Whether reported as separate lines on the financial report or as a cumulative https://personal-accounting.org/how-to-start-a-bookkeeping-business-in-9-steps/ value, the net amount of the pair of accounts is called the “net book value” of the individual asset. Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts. This helps the firms to evaluate the book value of their assets and liabilities.
What is the importance of Contra Asset Accounts?
Machinery, physical space, equipment, vehicles, etc., are some examples of common fixed assets. These will be highlighted in accumulated depreciation accounts. These amounts generally appear on the company’s balance sheets. Ultimately, an accumulated depreciation contra asset account helps the company reduce the gross amount of all the fixed assets within a company. Equipment is a long-term asset account that has a debit balance.
Revenue is shown on the income statement as a credit, it is the amount of revenue a business earns in a period. It might be important for a business to track the full cost of sales less contras to see the full picture. Contra asset accounts help companies record any reductions to their non-current and current assets. By doing so, they can bring their asset accounts to a more accurate position. 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.
How Contra Asset Accounts Work
Contra assets may be stated in separate line items on the balance sheet. Or, if they contain relatively minor balances, they may be aggregated with their paired accounts and presented as a single line item in the balance sheet. In either case, the net amount of the pair of accounts is referred to as the book value of the asset account in question. 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.
- To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts.
- This is an owner’s equity account and as such you would expect a credit balance.
- However, some asset accounts need a negative counterpart to reduce the balance of that account.
- Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods.
- Contra asset accounts include allowance for doubtful accounts and accumulated depreciation.