contra asset account definition and meaning

This allows the financial analyst to evaluate the company inventory’s current market value. Harold Averkamp (CPA, MBA) has worked as a university Law Firm Accounting and Bookkeeping 101 accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com.

A contra asset account is not classified as an asset, since it does not represent long-term value, nor is it classified as a liability, since it does not represent a future obligation. A contra asset account is an account that is used to offset another fixed asset account on the balance sheet. Contra asset accounts are typically used for accumulated depreciation, amortisation, and other accounting adjustments. For example, a company might have a contra asset account for depreciation expense and a separate asset account for equipment cost. There are three contra asset accounts that commonly appear in an organization’s chart of accounts.

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Below is the asset account debit balance and accumulated depreciation account credit balance on the balance sheet. In either case, using these accounts can help you better manage depreciation expense, keep your accounts receivable balance accurate, and properly dispose of and account for obsolete inventory. 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 . 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.

The allowance for doubtful accounts is used to reduce the net income by the estimated amount of uncollected receivables. This account helps to give a more accurate picture of the company’s financial position. Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a credit

balance. Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock. Whether reported as separate lines on the financial report or as a cumulative value, the net amount of the pair of accounts is called the “net book value” of the individual asset.

Definition of Contra Account

Both these aspects of the transaction are although entered in the same account, are mentioned in separate columns. This improvement in the accounting details and transparency is good for any business in multiple ways. ADAs are used to create allowances for clients that bought the company’s goods or services but somehow failed to pay the owed amount.

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. The allowance for these doubtful accounts can ultimately result in the total number of receivables.

Example of a Contra Account

The amount is reported on the balance sheet in the asset section immediately below accounts receivable. The net of these two https://adprun.net/affordable-startup-bookkeeping-and-accounting/ figures is typically reported on a third line. The company would then have a contra liability account for the bonds.

• Businesses can also write off many expenses like these from the financial records even if the inventory has been phased out completely.
• For example, Accumulated Depreciation is a contra asset account, because its credit balance is contra to the debit balance for an asset account.
• A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity).
• And it’s particularly important to track and manage these assets.