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A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger. The proper size of a contra asset account can be the subject of considerable discussion between a company controller and the company’s auditors. The auditors want to ensure that reserves are adequate, while the controller is more inclined to keep reserves low in order to increase the reported profit level. It can be used for any type of account such as asset, liability, capital, revenue. For example, assume a company made $10,000 in sales on credit.
- That is to completely or partially offset the balance of their related asset accounts.
- Long-Term Assets are parent accounts that contain the original acquisition cost of fixed assets.
- It has 3 major types, i.e., Transaction Entry, Adjusting Entry, & Closing Entry.
- Also, with IFRS asking to report it in a particular way, the accountants must be updated with recent changes to how the contra assets account should appear in the books of accounts.
- Treasury stock and drawing accounts are examples of contra equity accounts.
- Allowance for doubtful accounts 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 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. The book value of an asset is the value of the asset recorded in the company’s balance sheet. Contra accounts are needed for determining the book value of assets held by a company.
Does Issuing Common Stock for the Purchase of a Company Affect Retained Earnings?
The most common type of contra account is the contra-asset account. 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. Another reason to include contra accounts on a balance sheet is to preserve the historical value of the main account. This is done by separating the decreases that have occurred in the contra account from the original transaction amount.
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Types of contra accounts
A regular asset account typically carries a debit balance, so a contra asset account carries a credit balance. Two common contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts represents the percentage what is a contra asset of accounts receivable a company believes it cannot collect. Allowance for doubtful accounts offsets a company’s accounts receivable account. Accumulated depreciation offsets a company’s real property assets, such as buildings, equipment and machinery.
For her businesses, Nora is responsible for finances, marketing, operations, and fundraising. Along with The Balance, her writing has appeared in Thrillist, Insidehook and Vinepair.