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. 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).
However, these can cause a reduction in other balances on the statement. Allowance for doubtful accounts (ADA) is a ACCOUNTING & PAYROLL SERVICES 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 Asset, Contra Liability and Contra Equity
Contra accounts such as these have a debit balance and are deducted from the total amount of a company’s revenue. https://kelleysbookkeeping.com/bookkeeper360-review-2023-pricing-features-more/ 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. 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.
- In a sense, a contra asset account is a negative asset account that detracts from all of the other assets included in the balance sheet.
- Allowance for receivables is an account that companies maintain to record possible bad debts.
- Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset.
- A contra account is used in order to better portray the relationship between certain debits and credits within the overall financial structure of an entity.
- The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.
- A contra account can be used to remedy an error, to track depreciation of an asset, or to register payments that are not collectible.
It represents all the depreciation related to an asset or the company’s overall assets. Usually, companies add to the accumulated depreciation account after every accounting period. The accumulated depreciation account plays a vital role in representing the accurate value of an asset in the financial statements. Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset.
The Accounting Gap Between Large and Small Companies
Contra accounts are used to help a company report the original amount of a transaction as well as reductions that may have happened. They serve an invaluable function in financial reporting that enhances transparency in accounting books. There are many situations where one account is used to offset another account.