What Is a Contra Asset?

Contra asset accounts can be used in a variety of areas, but there are three contra asset examples that you should pay close attention to. In order to keep the accounts receivables as clean as possible with their historical values, we will use this contra account called allowance for doubtful accounts. For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance.

Taking the example of CCC again, the company has $50,000 in accounts receivable at year-end of December 31. CCC estimates that 5% of accounts receivable will most likely be unrecoverable. CCC bought equipment and machinery worth $100,000 at the beginning of the current financial year and estimates that the equipment and machinery will depreciate by $10,000 every year.

Do You Debit or Credit Discounts on Bonds Payable?

They can be used to create a running total of what is owed or received from third parties and can be used to balance the books. They are also useful for businesses that need to track transactions between multiple accounts. The accumulated depreciation will ultimately reduce the value of fixed assets when the two accounts are netted with each other.

Also known as a bad debt reserve, this is a contra account listed within the current asset section of the balance sheet. The doubtful debt reserve holds a sum of money to allow a reduction in the accounts receivable ledger due to non-collection of debts. Once a doubtful debt becomes uncollectable, the amount will be written off. 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.

Definition and Examples of Contra Assets

The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. A debit will be made to the bad debt expense for $4,000 to balance the journal entry. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000.

Accounting sources advise that the full amount of a bad debt be written off to the profit and loss account or a provision for bad debts as soon as it is foreseen. Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account.

Contra Account Definition in Accounting

Allowance for doubtful accounts (ADA) is a contra asset account used to create an allowance for customers that do not pay the money owed for purchased goods or services. The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables. If the balance in your allowance for doubtful accounts has a credit of $1,000 and your accounts receivable has $20,000 in normal debit balance, then the net value of the receivables is $19,000. The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean.

A contra expense account is a general ledger expense account that is expected to have a credit balance instead of the usual debit balance. In other words, the account’s credit balance is contrary to (or opposite of) the usual debit balance for an expense account. Allowance for doubtful accounts (ADA) is a contra asset account used to create an allowance for customers who are not expected to pay the money owed for purchased goods or services. Contra equity reduces the total number of outstanding shares on the balance sheet.

In bookkeeping, a contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit (negative) balance. The account offsets the balance in the respective asset account that it is paired with on the balance sheet. The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline. For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets. Assume that a company uses a contra expense account to record the amounts that employees paid toward the company’s health insurance costs.

Discount on Bonds Payable is a contra liability account with a debit balance, which is contrary to the normal credit balance of its parent Bonds Payable liability account. In the financial statements the purchases account would be offset against the contra expense accounts to show the net purchases. Inventory obsolescence is an expense account, while the allowance for obsolete inventory is a contra asset account, which aims to reduce the inventory valuation on your balance sheet.

Should Company A record the $1,000 as revenue or as a reduction of expense? Obviously, there is a great deal of flexibility depending on how you “paper” the transaction, but interested in thoughts on a holistic level. When the company pays the cost of having the flyer printed, a journal entry is done. When the original dollar amount is kept in the original account and a separate account is used for recording the deduction, the resulting financial information becomes more transparent and helpful for stakeholders. 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. Get instant access to video lessons taught by experienced investment bankers.