The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account. The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold. 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.

• Sometimes, it is important to keep the original balance of the accounts and create the contra accounts to be able to calculate the net value of the account.
• In the event that a contra account is not utilized, it can become increasingly troublesome to determine historical costs, which makes tax preparation time-consuming and difficult.
• The contra asset account, accumulated depreciation, is always a credit balance.
• Contra liability accounts are less commonly used than contra asset accounts.

The discount on bonds payable amount shows the difference between the amount of cash received when issuing a bond and the value of the bond at maturity. The difference between an asset’s account balance and the contra account balance is known as the book value. Whenever the balance of an account needs to be reduced in a company’s ledger, it is not always applicable to credit the account if it is an asset or debit the account if it is a liability. The definition can be expanded to include contra accounts in general.

Free Financial Statements Cheat Sheet

Business owners should understand the functions of contra accounts and their importance to maintaining accurate financial records. 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.

As mentioned, CA accounts are usually listed below their matching asset accounts, and the net values of those assets are written next to the contra accounts. The most common contra equity account is called “treasury stock.” This special account decreases the number of shares outstanding in the market because the company repurchases some of the shares from its buyers. Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks. Note that the contra liability account has a positive balance (a debit balance), and the liability account normally has a credit balance.

List of Components of Contra Asset Account

By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes. For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure https://www.bookstime.com/articles/quicken-bookkeeping is maintained on the general ledger even as the asset’s depreciation is recorded separately. Units should consider using an allowance for doubtful accounts when they are regularly providing goods or services “on credit” and have experience with the collectability of those accounts.

In this way, the historical cost, the amount of write-off, and the book value of an asset can always be seen on the balance sheet. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students contra asset account and professionals can learn and propel their careers. If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee.

What is a Contra Asset?

There are many situations where one account is used to offset another account. One common example is accumulated amortisation, which is a contra-asset account. This means that it acts in the opposite manner of a regular asset account. Contra accounts are used to help a company report the original amount of a transaction as well as reductions that may have happened. They serve an invaluable function in financial reporting that enhances transparency in accounting books. The amount on the equity contra account is deducted from the value of the total number of outstanding shares listed on a company’s balance sheet.

Asset accounts usually have a positive value which is the same as a debit balance. Note that in accounting, the term “book value” is also used interchangeably with net value. Therefore, the book value of an asset in the books is equal to its historical cost (the debit balance of the asset) minus the related amount of contra asset in the balance sheet (the credit balance of the contra asset). If you offer credit terms to your customers, you probably know that not all of them will pay.

Types of Contra Accounts – Explanation

Similarly, accrued liabilities reduce the total amount of current liabilities. Including contra accounts on a balance sheet is important as it allows for a more transparent view of a company’s financial position. This is done by separating the decreases that have occurred in the contra account from the original transaction amount. This allows the reader to see both the current and historical book values for a particular asset or liability. Sales returns, sales allowance and sale discounts are different examples of contra revenue accounts.

The contra asset account, accumulated depreciation, is always a credit balance. This balance is used to offset the value of the asset being depreciated, so as of September 1, your $8,000 asset now has a book value of $7,866.67. This type is paired with the asset account, which allows a business to record the original price or value of the asset at time of purchase. The contra asset account then allows recording of the value factoring in depreciation. Learn about the meaning of contra accounts, how and why they are used, and how to account for balances with them.