The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. Sales returns, sales allowance and sale discounts are different examples of contra revenue accounts. Contra accounts such as these have a debit balance and are deducted from the total amount of a company’s revenue.

This allows the reader to see both the current and historical book values for a particular asset or liability. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts reduce accounts receivable, while accumulated deprecation is used to reduce the value of a fixed asset.

Example of a Contra Account

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. 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.

A contra asset account is a type of account in financial accounting used to offset the balance of a corresponding asset account. Contra asset accounts have a credit balance, which is the opposite of the typical debit balance found in asset accounts. The purpose of a contra asset account is to record adjustments, allowances, or depreciation related to a specific asset, resulting in a more accurate representation of the net value of that asset on the financial statements. Allowance for Doubtful Accounts, Accumulated Depreciation, and Valuation Allowance for Marketable Securities are contra asset accounts; while Discounts on Bonds Payable is an example of a contra liability account. Treasury stock and drawing accounts are examples of contra equity accounts.

How to Record a Contra Account

For example, a building is acquired for $20,000, that $20,000 is recorded on the general ledger while the depreciation of the building is recorded separately. 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). Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting.

Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances. To account for this potential loss, GreenThumb creates a contra asset account called “Allowance for Doubtful Accounts” with a credit balance of $1,200 (3% of $40,000). On the balance sheet, the net accounts receivable will be reported as $38,800 ($40,000 – $1,200). To account for this potential loss, BikeWorld creates a contra asset account called “Allowance for Doubtful Accounts” with a credit balance of $2,400 (4% of $60,000). On the balance sheet, the net accounts receivable will be reported as $57,600 ($60,000 – $2,400). A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet.

What Happens to the Balance Sheet When Accounts Receivable Is Collected?

Contra Liability a/c is not used as frequently as contra asset accounts. It is not classified as a liability since it does not represent a future obligation. This process continues each year until the vehicles are fully depreciated. A contra asset account is an account that is paired with and offsets the balance of a related asset account.

Learn why contra accounts, when utilized correctly along with a paired account, are a crucial component of accurate accounting and financial review. 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. Sometimes, it is important to keep the original balance of the accounts and create the contra accounts to be able to calculate the net value of the account. A contra account is used in order to better portray the relationship between certain debits and credits within the overall financial structure of an entity.

Contra revenue account

It carries a credit balance, which is the opposite of the normal debit balance of asset accounts. The purpose of a contra asset account is to track and report reductions in the value of the related asset. As mentioned above, the primary situation in which contra asset accounts appear has to do with accumulated depreciation. Therefore, an example of a contra asset account involved with a depreciation situation seems reasonable to observe.

• The accumulated depreciation account is perhaps the most common contra asset account used by business owners.
• A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger.
• Contra liability accounts are special accounts in the liabilities section of the balance sheet.
• The balance sheet shows the amount in the asset section underneath the accounts receivable.
• 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.

Both the asset and the corresponding CA accounts must be stated clearly in the balance sheet. Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset’s net value or book value. Contra asset accounts provide more detailed information to financial statement users by showing both the gross and net amounts of the related asset accounts. They also help organizations track specific adjustments and discrepancies, allowing for better financial analysis and decision-making. If an asset is sold, then the amounts present in the contra-asset accounts due to depreciation are reversed so that they do not continue to increase over time now that the asset is no longer in the possession of the business. The balance in the allowance for doubtful accounts is used to find out the dollar value of the current accounts receivable balance that is deemed uncollectible.

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. Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Therefore, a contra asset can be regarded as a negative asset account. Offsetting the asset account with its respective contra asset account shows the net balance of that asset.

There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra liabilities reduce liability accounts and carry a debit balance. Contra revenue accounts reduce revenue accounts and have a debit balance.

Is a Contra Balances Negative or Positive?

Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. 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. The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation.