what is a contra asset

In accounting lingo, a dual entry account system includes the concept of a contra entry. It’s an entry that’s the offset or reverse of an entry that’s on the other side of the account. An entry will be recorded on the credit side if and when a debit entry is recorded in an account and vice-versa.

Usually, companies add to the accumulated depreciation account after every accounting period. Similarly, allowance for receivables will pair with accounts receivable balances. These balances cannot offset asset accounts that do not relate to them. Every contra asset account on a company’s accounting records will also have a pairing account.

How to Record a Contra Account

At Invoiced, we provide a suite of solutions that work together to make managing your invoicing, accounts receivable, and accounts payable seamless and easy. To convert your invoice management efforts to an electronic format that can easily share data with other financial systems, businesses can leverage Invoiced’s E-invoice Network. The hottest retail item of today can be relegated to nostalgia channels on YouTube tomorrow. And when your business still has some Basic Accounting Tips for Churches and Nonprofits of these outdated, unwanted, or unusable items in your inventory, you’ll want to offset the lost value of these assets in your general ledger and balance sheet. So rather than adjusting your Inventory account, you would update its contra account — Obsolete Inventory. A contra revenue represents any deductions or offsets that need to be removed from gross revenue to provide a clearer understanding of actual income  —  such as in the example just provided.

Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. Both these aspects of the transaction are although entered in the same account, are mentioned in separate columns. The $10,000 of depreciation will reduce the book value of the car. Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock.

How Contra Asset Accounts Work

The matching principle states that revenue and expenses must be recorded in the same period in which they occur. Therefore, the allowance is created mainly so the expense can be recorded in the same period revenue is earned. Some companies may classify different types of debt or different types of vendors using risk classifications. For example, a start-up customer may be considered a high risk, while an established, long-tenured customer may be a low risk.

Hence, the book value of the liability will be the credit balance of the liability account minus the debit balance of its contra liability counterpart. Both the asset and the corresponding contra asset accounts must be stated clearly in the balance sheet. Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset’s net value or book value. 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.

Allowance for Doubtful Accounts

In essence, contra-asset accounts have a negative balance while other asset accounts have a positive balance. Both of these accounts offset each other to represent a net balance on a company’s balance sheet. Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, https://personal-accounting.org/accounting-for-law-firms-a-guide-including-best/ i.e. the “final” revenue figure listed on the income statement. A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity). This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000.

The second entry will be accumulated depreciation, which will be in credit. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. The second method of estimating the allowance for doubtful accounts is the aging method. All outstanding accounts receivable are grouped by age, and specific percentages are applied to each group. The aggregate of all group results is the estimated uncollectible amount. As mentioned, companies do not represent these accounts on the balance sheet.

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