Contra Asset Definition

The purpose of a contra asset account is to store a reserve that reduces the balance in the paired account. By stating this information separately in a contra asset account, a user of financial information can see the extent to which a paired asset should be reduced. While accumulated depreciation is the most common contra asset account, the following also may apply, depending on the company.

How Are Accumulated Depreciation and Depreciation Expense … – Investopedia

How Are Accumulated Depreciation and Depreciation Expense ….

Posted: Sat, 09 Apr 2022 07:00:00 GMT [source]

An employee earns $32 per hour and 1.5 times that rate for all hours in excess of 40 hours per week. Assume further that the social security tax rate was 6.0%, the Medicare tax rate was 1.5%, and federal income tax to be withheld was$398. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns.

How Contra Asset Accounts Work

Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods. In this scenario, a write-down is recorded to the reserve for obsolete Contra Asset Definition inventory. Sometimes, the current value of a note receivable will fall compared to its face value. This process will give rise to a contra asset account which is the discount on notes receivables.

Contra Asset Definition

For companies, these represent receivables from various parties. Companies that hold inventories for a long time may face https://business-accounting.net/ accumulating obsolete inventory. Give an example of a contingent liability that is usually recorded in the accounts.

Contra Account Examples

This requirement also comes from the accounting standard for inventories. Allowance for receivables is an account that companies maintain to record possible bad debts. However, this account does not represent actual irrecoverable debts. A contra account is an account that companies use to reduce the value of a related account. It usually nets off against related accounts and provides an opposite effect to the balance. Therefore, contra accounts are the reverse accounts that decrease a specific account’s balance.

  • 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.
  • By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company.
  • A contra account is an account whose balance is the opposite of a corresponding account.
  • Despite being classified as a liability, it functions more like an asset because benefits are provided to the company.
  • Provision for a discount from creditors and discount on bills receivable are other widely used examples.
  • Therefore, contra asset accounts differ from other accounts that have a credit balance.
  • A contra-asset account shown as a deduction from the related asset account in the balance sheet.

Home Depot reports net receivables and net property and equipment, implying that both are reduced by contra assets. We’ll need to dig into the footnotes to find out what the contra accounts are. Each contra asset account serves a different specific purpose, but they are have a couple things in common, too. Contra asset accounts are used to reduce the debit balance of its corresponding asset account in order to calculate a net value for each asset.

What Is a Contra Account & Why Is It Important?

The provision for doubtful debts is a contra asset account related to debtors. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. 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.

Is contra account an expense?

A contra expense account is a general ledger expense account that will intentionally have a credit balance (instead of the debit balance that is typical for an expense account). In other words, this account's credit balance is contrary to (or opposite of) the usual debit balance for an expense account.

This loss is treated as an ordinary business expense and is deducted from the asset’s balance. As mentioned, CA accounts are usually listed below their matching asset accounts, and the net values of those assets are written next to the contra accounts. 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. To oppose the revenue made by a company, contra revenue accounts must have a debit balance.