Contra asset accounts also help companies keep their general ledgers organized. By recording reductions in a separate account, companies can get better insights into their actual accounts. Whenever an organization buys an asset and depreciates it over the asset’s useful economic life, the reduction in value accumulates over the year, which is called accumulated depreciation.
Examples of Contra Accounts
In the financial statements the asset a/c would be offset against the contra asset a/c to show the net balance. In bookkeeping terms, a contra asset account refers to an account which is offset against an asset account. The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet.
How to Use Contra Asset Accounts
The provision for doubtful debts is a https://formatscustomizer.com/checkUpdate_v21.php related to debtors. 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. If you’re still using manual accounting systems, you’ll need to do a bit more work by recording your accumulated depreciation expense in your general ledger while also reporting it on your balance sheet as a contra asset account. When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense.
- A contra asset is a negative asset account that offsets the asset account with which it is paired.
- The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline.
- The purpose of a contra asset account is to store a reserve that reduces the balance in the paired account.
- The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible.
- Contra liabilities reduce liability accounts and carry a debit balance.
Allowance for Doubtful Accounts Account
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By the end of the first-year machinery, the balance will be $100,000, and accumulated depreciation will show $20,000. By the end of 2nd-year, the machinery balance will still be $100,000, and accumulated depreciation will show $40,000. The netbook value of the machinery by the end of the first year will be $80,000 ($100,000-$20,000) and $60,000 ($100,000-$40,000) by the end of the second year. This method helps a third person identify what the book value was at the time of purchase and the remaining value of an asset.
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A second example of a contra asset account is Accumulated Depreciation. For instance, if a company has a plant asset such as Equipment with a debit balance of $92,000 and the account Accumulated Depreciation has a credit balance of $50,000, the carrying amount (or book value) of the equipment is $42,000. When a good is sold on credit, the amount receivable from customers is shown under the debtor’s balance sheet balance. It is a standard business practice to prepare an estimate for the amount likely to go bad.
An asset account which is expected to have a credit balance (which is contrary to the normal debit balance of an asset account). For example, the contra asset account Allowance for Doubtful Accounts is related to Accounts Receivable. The contra asset account Accumulated Depreciation is related to a constructed asset(s), and the contra asset account Accumulated Depletion is related to natural resources. Therefore, contra-asset accounts differ from other accounts that have a credit balance. By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount. Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset.