Both the asset and the corresponding contra asset accounts must be stated clearly in the balance sheet. Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset’s net value or book value. Note that in accounting, the term “book value” is also used interchangeably with net value.

Is Premium on Bonds Payable a Contra account?

The hottest retail item of today can be relegated to nostalgia channels on YouTube tomorrow. And when your business still has some of these outdated, unwanted, or unusable items in your inventory, you’ll want to offset the lost value of these assets in your general ledger and balance sheet. So rather than adjusting your Inventory account, you would update its contra account — Obsolete Inventory. A contra-asset account is an account that opposes the balances of other asset accounts.

• For example, it is not very useful to show the PPE cost account and the related accumulated depreciation account separately on the balance sheet.
• Therefore, contra accounts are the reverse accounts that decrease a specific account’s balance.
• For stakeholders, looking at both accounts is also crucial in their decision-making process.
• Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc.
• Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement.
• A doubtful debts contra account allows for future write-offs of accounts receivable.
• The account offsets the balance in the respective asset account that it is paired with on the balance sheet.

What Is the Benefit of Using a Contra Account?

For example, an asset was purchased by a company for $100,000 – that is, the historical cost of the asset was $100,000 – and its contra asset counterpart has a balance of $30,000. Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost. Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts.

What is a Contra Account?

Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases contra account other liabilities on the balance sheet. Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement.

• In other words, accumulated depreciation will be $10,000 each year until the car depreciates to $0 twenty years later.
• Instead, the existence of contra-asset accounts for companies will differ based on a company’s requirements.
• Similarly, if the parent account lists entries as debits, the contra account will appear as a credit.
• For a liability or revenue account that are naturally credit accounts, the contra accounts will be in a debit position.
• Contra Liability a/c is not used as frequently as contra asset accounts.

Similarly, it allows companies to retrieve original account balances without complicated calculations. For stakeholders, looking at both accounts is also crucial in their decision-making process. We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R). 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.

How are Contra Accounts Used and Reported?

So an Accumulated Depletion account would serve as the contra for the parent Fixed Asset account. You can estimate the total to record in the allowance for doubtful accounts based on uncollectible revenue totals from the previous year or you can conservatively estimate the amount. If you keep a lot of inventory in stock, chances are that some of the inventory will become obsolete. This frequently happens to manufacturing companies that sell products with an expiration date since any inventory remaining in stock past the expiration date quickly becomes obsolete. In other words, contra revenue is a deduction from gross revenue, which results in net revenue. A contra account is used to show the opposite effect or reduction of a related account.

• The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.
• Contra liability accounts are mainly used by corporations that issue bonds frequently.
• Both the asset and the corresponding contra asset accounts must be stated clearly in the balance sheet.
• That is because some of the bonds are issued at a discount, so this reduces the balance of their bonds payable.
• Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off.

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. Contra liability accounts are special accounts in the liabilities section of the balance sheet. This would let users of the financial statements calculate the book value of the liability. Whenever the balance of a contra asset account increases (credit to the contra asset account), the increased amount is written off as an expense and is reported in the company’s income statement.