By combining the balances in these two accounts, you can determine the net amount of receivables that the reporting entity expects to receive. The size of the reserve also reveals the amount of bad debt that the company expects to experience from the current set of receivables. Overall, contra accounts are offsetting balances that are the opposite of specific accounts.

What is a Contra Asset?

All three values can be useful for investors depending on what they’re looking for. They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting. 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 http://avtoinform.ru/statistik1.htm it comes to fixed assets. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Accumulated depreciation reflects the reduction in value of a fixed asset. It is paired with the trade accounts receivable account, and contains a reserve for receivables that are unlikely to be paid by customers.

Accumulated depreciation

Therefore, these companies must maintain an obsolete inventory reserve account to net off any unusable stock from the account. This requirement also comes from the accounting standard for inventories. However, there are some prevalent contra-asset accounts that may exist for all companies. This account offsets the balance in the respective asset account that they pair with on the balance sheet.

Presentation of Contra Asset Accounts

• Properly documenting these contra accounts in your ledger can sometimes feel counter-intuitive since they operate in an opposite manner from their parent accounts.
• For industries that rely on natural resources — mining, logging, oil, gas — depletion tracks the gradual exhaustion of the raw material in question, offsetting that loss in value against the initial appraisal of the land.
• 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.
• Usually, companies add to the accumulated depreciation account after every accounting period.
• There are several examples of contra accounts, including accumulated depreciation, accumulated depletion, accumulated amortization, allowance for receivables, etc.

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. The following are examples of commonly-used contra asset accounts you could create to better understand your business financials. However, it’s important to keep in mind that you can create any contra account you want to more clearly describe your business — this is not an exhaustive or definitive list.

Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. These contra revenue accounts tend to have a debit balance and are used to calculate net sales. As mentioned, there can be a contra account for any type of transaction depending on a company’s needs. Other than the above https://deca.md/sefi-noi-in-partidul-maiei-sandu/ contra-asset accounts, we often see contra-revenue accounts for any sales returns or sales rebates. The equity section of the balance sheet is where the shareholder’s claims to assets are reported. The main contra equity account is treasury stock, which is the balance of all stock repurchased by the company.

For example, a bond with a principal amount of $1,000 may be sold for only $950. The bond is listed on the balance sheet at the full amount of $1,000, but the cash received is just $950, so a contra liability for the discount is listed to make the entry balance. Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. Similarly, allowance for receivables will pair with accounts receivable balances. These balances cannot offset asset accounts that do not relate to them.

While accumulated depreciation is the most common contra asset account, the following also may apply, depending on the company. 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. Asset accounts always maintain a debit balance, so anytime that you increase the value of an asset, such as when you deposit customer payments or invoice a customer, that asset account is debited or increased. Likewise, when you pay a bill, your cash account is reduced (credited) because you’re lowering the balance.

• Accumulated depreciation is the most prevalent type of contra-asset account.
• Now, if that sounded like a lot of mumbo-jumbo jargon to you, don’t worry.
• The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets.
• Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period.

To put it another way, a contra account is an account listed within a general ledger with the purpose of capturing the reduced value of a paired or related account when the two are added together. The contra accounts will be grouped in the same category on the balance sheet or income statement as their related http://sapanet.ru/katalog-knig/bukhgalteriya-nalogi-audit/accountants-guide-to-the-internet1.html accounts. Generally speaking, the use of contra accounts is to ensure their related accounts stay clean and to keep track of historical cost easier. Contra liabilities are common in companies that sell bonds to raise capital. To drum up interest in the bond, the company will sell it at a discount.