Contra Accounts Examples & How They Work

The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. Most asset accounts will carry a debit balance, but contra asset accounts will show an opposite balance—usually expressed as a credit. Contra asset accounts are linked to regular asset accounts and serve to present a more accurate and realistic view of asset valuation as well as reduce the value of the asset account. Learn more about how contra asset accounts impact financial statements. A contra-asset account reduces the value of an asset on your balance sheet.

#4 – Accumulated Depreciation

At the end of the accounting period, update your financial statements to include contra account balances. On the balance sheet, subtract contra assets from total assets and adjust liabilities using contra liability accounts. On the income statement, deduct contra revenue from gross revenue to get net revenue. These adjustments give a clearer view of your company’s financial position. A common use of contra asset accounts is to show accumulated depreciation. This kind of contra account serves to provide a realistic market value of tangible and fixed assets like buildings and factories, delivery fleets, and production machinery.

Keeping these adjustments separate prevents errors and ensures transparency. A contra-asset account has a credit balance, which lowers the total asset value. A contra-revenue account has a debit balance, reducing total revenue, and a contra-liability account also has a debit balance. A contra-equity account records a debit, reducing shareholder equity. Businesses use contra accounts to maintain accurate financial records. These accounts adjust assets, liabilities, revenue, and equity without altering the original transactions.

Contra-asset accounts

• By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company.
• On the income statement, deduct contra revenue from gross revenue to get net revenue.
• In other words, contra revenue is a deduction from gross revenue, which results in net revenue.
• 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.
• It is prepared when there is a reduction in the value of assets due to wear and tear continuous use or when we expect that a certain percentage of accounts receivable will not be received.

It is only prudent to show the reduction or reserve in a separate account, and at any point, it gives us the netbook value explaining what the actual cost was and how much of that has been depreciated. It also helps create reserves, and later any change in the expected number can be adjusted through allowances and reserves. A contra account is a ledger account related to another specificledger account. In fact, as the name “contra” suggests, it is the opposite of aspecific class of account. For industries that rely on natural resources — mining, logging, oil, gas — depletion tracks the gradual exhaustion of the raw material in question, offsetting that loss in value against the initial appraisal of the land. So an Accumulated Depletion account would serve as the contra for the parent Fixed Asset account.

Reserve for Obsolete Inventory

Contra asset accounts are necessary for companies for various reasons. The most prominent of these include allowing companies to present a more accurate picture of their assets. After each accounting period, the company records a depreciation expense of the asset.

This credit balance reduces the overall value of the related asset account. The contra revenue account is a reduction from gross revenue, which results in net revenue. These transactions are reported in one or more contra revenue accounts, which usually have a debit balance and reduce the total amount of the company’s net revenue. Contra assets are accounts in the general ledger—where you enter your transactions—that carry a balance used to offset the account with which it is paired.

• The netbook value of the machinery by the end of the first year will be $80,000 ($100,000-$20,000) and $60,000 ($100,000-$40,000) by the end of the second year.
• This is the reason they are categorized as a contra account as the normal asset accounts have positive or debit balance.
• Offsetting the asset account with its respective contra asset account shows the net balance of that asset.
• A contra-asset account reduces the value of an asset on your balance sheet.
• It is a contra asset account and is directly related to the accounts receivable (asset).

A better way to send invoices and receive payments.

For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets. In the financial statements the asset account would be offset against the contra asset account to show the net balance. 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. Allowance for doubtful debt is a provision created for invoices that are expected to be uncollectible at some point in future years. It is a contra asset account and is directly related to the accounts receivable (asset).

As we have seen in the above discussion, how reporting contra assets accounts helps in a better understanding of the financial statements of any organization. So, an organization looking for a robust accounting process must move to this reporting for better understanding. Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Therefore, a contra asset can be regarded as a negative asset account.

Contra asset accounts also provide a clear picture of the companies’ accumulation of assets. Similarly, these accounts can also be essential in various calculations. 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. Any company that owns intangible assets such as software, patents, etc., will maintain an accumulated amortization account.

A contra account is an asset account that is kept at either a negative or zero balance and is used on a balance sheet to offset contra asset account the positive balance of a paired asset. To put it another way, a contra account is an account listed within a general ledger with the purpose of capturing the reduced value of a paired or related account when the two are added together. A contra-asset account is an account that opposes the balances of other asset accounts.

Instead of reporting the assets at their carrying amount directly, assets are reported at their historical costs and are reduced to book value by reporting the allowance for depreciation along with it. As your business acquires new assets (e.g., machinery, office equipment, vehicles), you record the initial purchase value in your Fixed Asset account. But these items don’t retain that initial value; if liquidated, they would likely be sold at a loss. In order to record this ongoing value drop, you would use a corresponding contra account — an Asset Depreciation account. A contra account carries a balance that is opposite to the normal balance of its related main account. Accounts Receivable is an asset account that represents the amount of money due to a business for goods or services that have been delivered or used but not yet paid for by customers.

Every contra asset account on a company’s accounting records will also have a pairing account. For example, accumulated depreciation will go along with related assets. Therefore, contra-asset accounts differ from other accounts that have a credit balance. Whether it’s accumulated depreciation, allowance for doubtful accounts, or another type of contra asset account, understanding how these accounts work is essential for anyone involved in accounting or finance. And now, with some real-world examples and a fun coffee analogy, you’re ready to tackle them with confidence.

Usually, credit balances include items from one of those two natures. Similarly, contra asset accounts “filter out” the parts of an asset’s value that have been used up or might not be collectible, leaving you with a clearer picture of what’s actually useful. These accounts also help businesses track the gradual reduction in value of their assets, whether through depreciation, amortization, or other means. This transparency is essential for investors, creditors, and anyone else evaluating the company’s financial health. Far less common is the obsolete inventory reserve, which reduces the overall inventory value on the balance sheet.