Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at Scale Venture Partners, focused on technology. He’s currently a VP at KCK Group, the private equity arm of a middle eastern family office. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions. For example, if you bought a car for $10,000 seven years ago and you estimated a seven-year life on the vehicle. Now, the car is worth less than $1,000 and you continue to put more money into upkeep, maintenance, and insurance for the car than the value of the vehicle. Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

What are the types of Contra Asset Accounts?

The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable. Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000. Contra asset accounts are a type of contra account that net off against asset accounts.

Examples of Contra Asset Accounts

It is not classified as a liability since it does not represent a future obligation. Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit contra account balance actually represents a negative amount. A contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability. If there’s an increase to allowance for uncollectible accounts, you record the same amount in the bad debt expense of your income statement.

• Although you have not officially written off these debts yet, you show them to be a negative balance because you don’t believe the customer will pay you.
• Simply hit Control + N under the Chart of Accounts or Edit, then click New (to create a new account).
• To avoid this loss of important data, we record actual cost and depreciation in separate ledger accounts.
• The most prominent of these include allowing companies to present a more accurate picture of their assets.
• 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.

Is Premium on Bonds Payable a Contra account?

A separate account used in such a situation is sometimes called a adjunct account. In an accounting system, ledger accounts are designed to contain only similar transactions and/or balances. A separate account is needed whenever the nature of transactions changes. It is because clubbing together dissimilar transactions impedes any analysis.

The account Allowance for Doubtful Account is credited when the account Bad Debts Expense is debited under the allowance method. 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. Using the allowance for doubtful accounts, the contra asset account will more accurately reflect your true accounts receivable balance and make sure sure that your financial statements reflect the most accurate information possible.

Contra revenue

For instance, it is common to keep the purchase price of a piece of equipment as a historical cost in the debit asset account when it comes to fixed assets. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value.

Examples of a contra revenue accounts include sales returns, sales discounts, and sales allowances. You debit the contra revenue accounts and credit the corresponding revenue accounts. For example, when you debit the balance in sales returns account, make sure that you offset the sales revenue account with a credit balance. Overall, contra accounts are offsetting balances that are the opposite of specific accounts.

How are Contra Accounts Used and Reported?

This balance is used to offset the value of the asset being depreciated, so as of September 1, your $8,000 asset now has a book value of $7,866.67. Writing off your obsolete inventory in this manner allows you to expense the cost of the obsolete inventory while also decreasing your current inventory balance using the contra asset account. Anytime you need to depreciate an asset, you’ll use an accumulated depreciation contra asset account, which records the amount of depreciation that has been expensed while offsetting the value of the asset being depreciated. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. Note that the contra liability account has a positive balance (a debit balance), and the liability account normally has a credit balance. Hence, the book value of the liability will be the credit balance of the liability account minus the debit balance of its contra liability counterpart.

• A contra-asset account is an account that opposes the balances of other asset accounts.
• Although contra-asset accounts have credit balances, they do not appear in liabilities or equity.
• But sometimes, dissimilar transactions are important to consider together within a ledger.
• Instead, it is reported at its full amount with an allowance for bad debts listed below it.
• In this scenario, a write-down is recorded to the reserve for obsolete inventory.
• For example, when your company borrows money, you would identify that debt in a Notes Payable account.
• For example, if a company just reported equipment at its net amount, users would not be able to observe the purchase price, the amount of depreciation attributed to that equipment, and the remaining useful life.