Contra Asset Examples, How a Contra Asset Account Works

Discount on bonds payable is a result of a bond issued for less than the face value of the bond. Companies must bring the balance of the discount on bonds payable account to zero over the life of the bond, which is accomplished through amortization. The amount recorded in the discount on bonds payable account is amortized to interest expense over the life of the bond. Amortization of the discount on bonds payable account decreases its balance and increases the balance in the interest expense account. This amount is typically paired with the company’s current assets on the balance sheet.

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Contra-account definition

Contra assets may be stated in separate line items on the balance sheet. Or, if they contain relatively minor balances, they may be aggregated with their paired accounts and presented as a single line item in the balance sheet. In either case, the net amount of the pair of accounts is referred to as the book value of the asset account in question. 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. Allowance for doubtful accounts is a contra asset account used to create an allowance for customers that are not expected to pay the money owed for purchased goods or services.

The balance sheet would show the piece of equipment at its historical cost, then subtract the accumulated depreciation to reflect the accurate value of the asset. 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.

How to calculate accumulated depreciation

Contra Equity Account – A contra equity account has a debit balance and decreases a standard equity account. Treasure stock is a good example as it carries a debit balance and decreases the overall stockholders’ equity. A contra account is an account with a balance opposite the normal accounts in its category.

This type of account could be called the allowance for doubtful accounts or bad debt reserve. The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. However, there is always a chance that the customer will not pay, in which case the account receivable becomes an uncollectible debt.

How to Record Abandonment on Cash Flow Statements

Companies like to depreciate assets as quickly as possible to get the tax savings, so the balance sheet may not state the true value of fixed assets. You don’t have to, yet even a small business will benefit by using the contra asset account for https://online-accounting.net/ accounts receivable. This eliminates the need to write off large accounts receivable balances at year end since they’ve already been accounted for. If you offer credit terms to your customers, you probably know that not all of them will pay.

• Purchases of oil and gas wells, timber, and fossil and mineral deposits are recorded on a company’s balance sheet as natural resources.
• It appears on the balance sheet as a reduction from the gross amount of fixed assets reported.
• Accumulated depreciation is an asset account with a credit balance known as a long-term contra asset account that is reported on the balance sheet under the heading Property, Plant and Equipment.
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• The account Allowance for Doubtful Account is credited when the account Bad Debts Expense is debited under the allowance method.

Contains the amount of sales discount given to customers, which is usually a discount given in exchange for early payments by customers. Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years. $100,000 – $5,000 (the 5% allowance for doubtful accounts) to equal a net receivable amount of $95,000.

Different types of contra asset

The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. This depreciation is saved in a contra asset account called accumulated depreciation. The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment. The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. 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. Contra liabilities are not seen on a balance sheet as often as contra assets.

Bench assumes no liability for actions taken in reliance upon the information contained herein. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Accounts receivable are usually incurred when buyers pay a company for its products or services with credit. Cash equivalents are any type of liquid securities that are not in the form of cash currently, but that will be in the form of cash within a year. Cash and cash equivalents are the most liquid of assets, meaning that they can be converted into hard currency most easily.

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Likewise, when you pay a bill, your cash account is reduced because you’re lowering the balance. A machine purchased for $15,000 will show up on the balance sheet as Property, Plant and Equipment for $15,000.

A contra account can be used to remedy an error, to track depreciation of an asset, or to register payments that are not collectible. Depending on the industry of the company in question, a current asset could be anything from crude oil to foreign currency. For example, an auto manufacturer may count auto parts as a current asset. On the other hand, a mutual fund may count short term investments or bonds. Inventory that is purchased by consumers and moves quickly is known as fast moving consumer goods, or FMCG, and is the primary type of inventory that also falls under the category of current assets.

Inventories include merchandise or goods that are ready to be sold, and other assets that are in the process of producing goods. Beginner’s Guide to Financial Statements When researching companies, the financial statement is a great is depreciation a contra asset place to start. However, if you sell items that quickly become obsolete, such as consumable products with an expiration date or electronics that become quickly outdated, using the allowance for obsolete inventory is a must.

• Accumulated depreciation is presented in the balance sheet and reduced from the gross amount of fixed tangible assets to derive the net value of the asset.
• “Accumulated Depreciation” is the contra account used to record depreciation.
• Showing contra accounts such as accumulated depreciation on the balance sheets gives the users of financial statements more information about the company.
• Payments to insurance companies or contractors are common prepaid expenses that count towards current assets.
• Accumulated depletion is similar to accumulated depreciation but takes into account the total amount depleted from natural resources.
• If the related account is a liability account, then a contra liability account is used to offset it with a debit balance.