Contra Asset Examples, How a Contra Asset Account Works

If the bond is sold at a discount, the company will record the cash received from the bond sale as “cash”, and will offset the discount in the contra liability account. The contra accounts in the balance sheet help the users of the financial statement to get complete information. If the values are reported at net value, the users may not able to see how each of the elements has performed over the years. Let’s consider the above example of machinery, if it is reported at net value (after reducing depreciation), user may not in a position to know the purchase cost of the of machinery; how much depreciation is written off etc. Any entry made to contra accounts is presented on a company’s balance sheet under the paired account.

Types of Contra Accounts – Explanation

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Contra asset account definition

These examples illustrate how contra accounts are used in various contexts to provide a more accurate picture of a company’s financial position and performance. 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.

Contra equity accounts

Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. In other words, accumulated depreciation will be $10,000 each year until the car depreciates to $0 twenty years later. The main reason is to make the remaining shares more valuable, as their prices are expected to rise after the stock buyback. The auditors aim to keep contra account the balances at their adequate levels, but the controller might want to keep them as low as possible to reduce expenses and maximize profit levels. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching.

Importance of Contra Accounts

The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet. Notes payable or bills payable represents a liability created when a company signs a written agreement to borrow a specific amount of money. The granter may offer the company a discount if it repays the note early. The discount reduces the total amount of the note to reflect the discount given by the granter. You might have seen in the balance sheet; all the accounts are shown at the net value after all the adjustments.

• Contra Liability a/c is not used as frequently as contra asset accounts.
• Treasure stock is a good example as it carries a debit balance and decreases the overall stockholders’ equity.
• When researching companies, the financial statement is a great place to start.
• But sometimes, dissimilar transactions are important to consider together within a ledger.
• For example, a company made sales of $60,000 but goods worth of $2,000 were returned due to damage.
• Only by using this account, you can offset the respective asset account that it is paired in the balance sheet.

Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off. The following are examples of commonly-used contra asset accounts you could create to better understand your business financials. However, it’s important to keep in mind that you can create any contra account you want to more clearly describe your business — this is not an exhaustive or definitive list. In the realm of accounting, various techniques are used to ensure financial statements provide an accurate and comprehensive view of a company’s financial health. One such method is the use of contra accounts, a type of account that directly correlates and offsets a related account.

Contra Asset Accounting & Examples

Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Accumulated depreciation reflects the reduction in value of a fixed asset. These less-frequent contra accounts come into play when you need to account for changes in the outstanding liabilities for your business.

• If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming.
• These accounts will typically help track sales discounts, product returns, and allowances (e.g., a price reduction for a good with minor defects).
• Contra accounts are confusing at first, but, with a little study, understanding them becomes second nature.
• The granter may offer the company a discount if it repays the note early.
• 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 Contra Revenue Account

• Instead of reporting the net sales on the income statement directly, the sales returns are shown as well.
• You might have seen in the balance sheet; all the accounts are shown at the net value after all the adjustments.
• However, it’s important to keep in mind that you can create any contra account you want to more clearly describe your business — this is not an exhaustive or definitive list.
• For example, a company has an accounts receivable balance of $30,000 for the year ended 31st December 2019.
• CCC bought equipment and machinery worth $100,000 at the beginning of the current financial year and estimates that the equipment and machinery will depreciate by $10,000 every year.

Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance. A debit will be made to the bad debt expense for $4,000 to balance the journal entry. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000.