Understanding Contra Asset Account Types and Examples

With the contra asset examples appropriate level of automation integration in your chosen tool, you can pull the relevant values into these individual accounts directly from invoices, credit agreements, and other documentation. When the two balances are offset against each other they show the net balance of both accounts. 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.

Reserve for Obsolete Inventory

By recording reductions in a separate account, companies can get better insights into their actual accounts. Contra asset accounts also provide a clear picture of the companies’ accumulation of assets. For example, after six years, the asset’s book value on the balance sheet will be $40,000. However, it will also have a negative accumulated depreciation of $60,000, offsetting that cost.

• For example, if a company has a liability account for unearned revenue, they would also have a contra liability account to offset the balance in the unearned revenue account.
• By recording reductions in a separate account, companies can get better insights into their actual accounts.
• They’re balance sheet accounts, but their activity (like depreciation expense) may flow through to the income statement as an expense.
• By showing the “used up” or uncollectible portion of an asset, they provide a clearer picture of a company’s financial position.
• The calculated bad debts expense affects the income statement by recognizing an expense related to receivables that are unlikely to be collected.
• It appears on the balance sheet and negates the gross amount of fixed assets such as buildings, machinery, office equipment, furniture, and vehicles.

Understanding Contra Accounts: Definition, Examples, and Importance

• Contra accounts are essential tools in accounting that provide a method to accurately reflect adjustments and reductions in related accounts.
• Any company that owns intangible assets such as software, patents, etc., will maintain an accumulated amortization account.
• Accounts Receivable and Allowance for Doubtful AccountsA classic example of a contra asset account is the Allowance for Doubtful Accounts.
• By nature, typical asset accounts possess a debit balance; however, contra asset accounts typically have a credit balance.

For its day-to-day operations, the business maintains a fleet of 75 identical 2016 Ford Explorer limousines, each initially retailing at $150 thousand. However, these vehicles have experienced significant wear and tear in the intervening years. And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand. So an Accumulated Depletion account would serve as the contra for the parent Fixed Asset account. This process calculates the decline in value of the natural resource and offsets it against the initial appraisal of the land where the https://www.bookstime.com/bookkeeping-services/portland resource is being extracted from.

Assessing Valuation Allowances

The purpose of the Owner’s Withdrawal account is to track the amounts taken out of the business without impacting the balance of the original equity account. Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers. The amount is not reported, and the net sales amount is reported on the income statement. The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount. This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms. Most accounts receivable would just be the time between purchase and credit card settlement.

When the company pays the cost of having the flyer printed, a journal entry is done. We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R). Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. A business called Show-Fleur offers private driving tours of local botanical gardens — all from the comfort of high-end limousines.

Contra Equity Accounts

The accumulated depreciation account is designed to reduce the carrying value of the fixed asset account when depreciation is recorded at the end of each period. A contra account is an account that is used to offset the balance of a related account on a company’s financial statements. A contra asset is paired with an asset account to reduce the value of the account without changing the historical value of the asset. Examples of contra assets include Accumulated Depreciation and Allowance for Doubtful Accounts. Unlike an asset which has a normal debit balance, a contra asset has a normal credit balance because it works opposite of the main account. This is the reason they are categorized as a contra account as the normal asset accounts have positive or debit balance.

Revenue is an income statement account, but it flows through to the equity section of retained earnings Accounting Periods and Methods as well. Any products that are sold at a discount or returns are deducted from gross revenue to produce net revenue as the top line on the income statement. Allowance for doubtful accounts is netted from the accounts receivable balance. The company predicts which accounts receivable won’t be paid by customers and writes those off.