Define Contra Asset Account

Contra accounts do that by preserving the purchase and acquisition costs of their corresponding accounts and disclosing any deduction in their balances. They can present more information about the assets and liabilities of the company. Such information includes the purchase cost of an asset , the amount of depreciation written off for that asset, etc. Sometimes, it is important to keep the original balance of the accounts and create the contra accounts to be able to calculate the net value of the account. Any company that owns intangible assets such as software, patent, etc., will maintain an accumulated amortization account.

A contra account is a negative account that is netted from the balance of another account on the balance sheet. This depreciation is saved in a contra asset account called accumulated depreciation. The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment. The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean.

Definition of Contra Asset

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 allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables. Contra asset is a tool that business uses to manage their balance sheet more accurately. Businesses need to have contra assets because it gives investors and creditors a better idea of the company’s financial condition.

Define Contra Asset Account

At the same time, depreciation for the van at the end of the year ended up at $500. And the depreciation for the office equipment ended up at $1,000. Most accountants choose to record the depreciation over the useful life of an item in the accumulated depreciation contra asset account, which is a credit account.

What Happens to the Balance Sheet When Accounts Receivable Is Collected?

A contra account is an account that is used to offset another account. The balance in the contra account is reduced when the corresponding asset or liability it is paired with is disposed of. The allowance method of accounting enables a company to determine the amount reasonable 100% Free Tax Filing For Simple Returns Only to be recorded in the contra account. There are many situations where one account is used to offset another account. One common example is accumulated amortisation, which is a contra-asset account. This means that it acts in the opposite manner of a regular asset account.

What is a contra asset account?

Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities include discount on notes or bonds payable.

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