In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000. If the asset account had a credit balance or the contra asset account had a debit balance, this would indicate an error in the journal entries. Note that in accounting, the term “book value” is also used interchangeably with net value. 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.
This type of account could be called the allowance for doubtful accounts or a 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. The amount is reported on the balance sheet in the asset section immediately below accounts receivable. The net of these two figures is typically reported on a third line. A less common example of a contra asset account is Discount on Notes Receivable.
What Are the Different Types of Contra Accounts?
While accumulated depreciation is the most common contra asset account, the following also may apply, depending on the company. The importance of contra asset accounts is generally to reduce the https://simple-accounting.org/nonprofit-bookkeeper-vs-accountant-who-should-you/ value of some related account. The contra asset account pulls the value of the combined accounts down, which in turn decreases the value of the second account as well, which is a normal account.
These contras reduce the equity account and carry a debit balance. Contra equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock.
Presentation of Contra Assets
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. In accounting, assets are things of value that your business owns. Your bank account, the inventory you currently stock, the equipment you purchase, and your accounts receivable balance are all considered asset accounts.
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. This improvement in the accounting details and transparency is good for any business in multiple ways. The allowance for these doubtful accounts can ultimately result in the total number of receivables. The stock that a corporation buys back is called treasury stock.
Contra Account Examples
The account offsets the balance in the respective asset account that it is paired with on the balance sheet. 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 What is best nonprofit accounting software 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 contra asset account. 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 accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. A contra account is a general ledger account with a balance that is opposite of the normal balance for that account classification. The use of a contra account allows a company to report the original amount and also report a reduction so that the net amount will also be reported.