contra asset account

Still, it is important when possible to consider how the net accounts are calculated and be wary of companies that are reporting a ton of bad debts. 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 from outstanding accounts.

contra asset account

Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset. Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. 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.

Overview of contra accounts

Mark to market is a method of measuring the fair value of accounts that can fluctuate over time, such as assets and liabilities. Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life to account for declines in value over time. The allowance https://www.bookstime.com/ method of accounting allows a company to estimate what amount is reasonable to book into the contra account. The information featured in this article is based on our best estimates of pricing, package details, contract stipulations, and service available at the time of writing.

Contra asset accounts provide business owners with the true value of certain asset accounts. For example, let’s say your accounts receivable balance is currently $11,500, but you’re not entirely sure that you’ll be able to collect the entire balance due. The allowance for doubtful accounts is a contra asset because it reduces the value of the accounts receivable account on the general ledger. Often when a company extends goods on credit, management expects some of those customers not to pay and so anticipates writing off bad debt. Both the asset and the corresponding CA accounts must be stated clearly in the balance sheet.

What is a contra asset account?

A contra liability account is the lesser known type of a contra account. Therefore, a contra asset account is credited in order to reduce the amount of the asset. An example of a contra account is Accumulated Depreciation which is a contra asset account.

contra asset account

In response, the firm should decrease its accounts receivable and revenue balances. That is done by crediting accounts receivable by $100 and debiting the contra revenue account sales returns and allowances for $100. Hence, the company will have gross revenue or net sales equal to $9,900. However, some asset accounts need a negative counterpart to reduce the balance of that account. The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. The same is true for other asset accounts like accounts receivable. Accounts receivable is rarely reported on the balance sheet at its net amount.

What Are the Consequences of Overstating Your Accounts Receivable?

It is shown as a part of the owner’s equity in the liability side of the company’s balance sheet. The transactions made in this account are reported on a company’s financial statements directly under the related account. A general ledger is a record-keeping system for a company’s financial data, with debit and credit account records validated by a trial balance. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. This type of account could be called the allowance for doubtful accounts or bad debt reserve. The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. Key examples of contra accounts include accumulated deprecation and allowance for doubtful accounts.