contra asset account definition

He’s currently a VP at KCK Group, the private equity arm of a middle eastern family office. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions. http://memento.sebastopol.ua/kyrs-bitkoina-rastet-v-sredy-posle-izbraniia-trampa-novym-prezidentom-ssha Master accounting topics that pose a particular challenge to finance professionals. This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders.

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. The account offsets the balance in the respective asset account that it is paired with on the balance sheet. In response, the firm should decrease its accounts receivable http://nomeessentado.com/discovering-a-punta-cana-marriage-ceremony-photographer-in-time.html and revenue balances. That is done by crediting accounts receivable by $100 and debiting the contra revenue account sales returns and allowances for $100. Hence, the company will have gross revenue or net sales equal to $9,900. To oppose the revenue made by a company, contra revenue accounts must have a debit balance.

What Is a Contra Account?

Contra revenue accounts reduce revenue accounts and have a debit balance. An account with a balance that is the opposite of the normal balance. For example, Accumulated Depreciation is a contra asset account, because its credit balance is contra to the debit balance for an asset account.

contra asset account definition

Therefore, the asset’s net value (or the book value) will be $70,000. 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.

Presentation of Contra Asset Accounts

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. Allowance for doubtful accounts (ADA) is a contra asset account used to create an allowance for customers who are not expected to pay the money owed for purchased goods or services. The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables. Contra accounts are an essential component of the accounting process, designed to reflect the true value of assets, liabilities, equity, or revenue of a business.

The definition can be expanded to include contra accounts in general. Contra accounts act like regular accounts on the balance sheet but have a unique purpose. A contra account is an account used in a general ledger to https://cambridgeraes.info/author/jin-yu/page/10/ reduce the value of a related account when the two are netted together. The term “contra” means “against,” which perfectly describes the role these accounts play in your finances – they are going against the norm.

The Advantage of Using a Contra Asset Account

The exact process can vary depending on the specific contra account and the accounting practices of the company. However, the fundamental principle is that the contra account is used to offset the related main account, providing a more nuanced view of the company’s financial position. Each of these contra accounts serves to provide more detailed information about the transaction history of the related main account. By tracking contra accounts, a company can make more informed decisions about asset management, liability settlement, and overall financial planning.