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.
- Contra revenue accounts typically offset revenue accounts in a firm’s income statement.
- This is especially true in cases where the contra account has a debit balance, as this will reduce the total amount of the corresponding account.
- Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.
- This account is not classified as an asset since it does not represent a long-term value.
- Learn what a contra asset is and how you can use these accounts in your small business.
Accumulated Depreciation account for the respective asset account which is contra-asset account. Accounts in any business hold important information regarding different aspects of the entity and its operations. And to keep the information relevant and reliable these accounts needs to be updated to record all such transactions that relates to particular account. For example, funds deposited in the bank account and withdrawn are recorded in the Bank account. The discount on bonds payable amount shows the difference between the amount of cash received when issuing a bond and the value of the bond at maturity.
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. Suppose a clothing business has sold $50,000 of inventory on credit. Get instant access to video lessons taught by experienced investment bankers.
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. When the amount recorded in the contra revenue accounts is subtracted from the amount of gross revenue, it equals the net revenue of a company. In case a customer returns a product, the company will record the financial activity under the sales return account. If a listed company purchases its own shares from the open market, it will have to debit the treasury stock account in order to record the transaction. A company might decide to purchase its stock when the board of directors feel the stock is undervalued or when it wishes to pay its shareholders dividends.
Do Contra Accounts Have Debit or Credit Balances?
Contra revenue account, which is used to record the net amounts and usually has a debit balance, as opposed to the revenue account that records the gross amounts. They can indicate how certain assets or contra asset account liabilities are performing throughout the years. Contra accounts do that by preserving the purchase and acquisition costs of their corresponding accounts and disclosing any deduction in their balances.
- 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.
- You may not need to use contra asset accounts right now, but as your business grows, using contra asset accounts will likely become a necessity.
- Contra Liability a/c is not used as frequently as contra asset accounts.
- It is a contra-account, the difference between the asset’s purchase price and its carrying value on the balance sheet.
Bad debt expense is an expense that a business incurs once the repayment of credit previously extended to a customer is estimated to be uncollectible. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.
Contra Account Examples
The proper size of a contra asset account can be the subject of considerable discussion between a company controller and the company’s auditors. The auditors want to ensure that reserves are adequate, while the controller is more inclined to keep reserves low in order to increase the reported profit level. A contra account is an account that is used to offset another account. The balance in the contra account is reduced when the corresponding asset or liability it is paired with is disposed of. When recording assets, the difference between the asset’s account balance and the contra account balance is the book value of the asset. 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.
Discount on notes payable reduces the total amount of the note to reflect the discount offered by the lender. The transactions made in this account are reported on a company’s financial statements directly under the related account. Contra assets allow for more granular visibility on the balance sheet by maintaining historical costs and independent values rather than reducing the original account directly. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. The amount is reported on the balance sheet in the asset section immediately below accounts receivable. The net of these two figures is typically reported on a third line.