21 Aug What Is A Contra Asset Account – Explained 2022
A Contra Asset Account’s usage is done in a general ledger to lessen the value of an associated account when the two are netted together. A natural balance of the contra account is the opposite of the related account. If a debit is the natural balance documented in the associated account, the contra account accounts a credit. For instance, the contra account on behalf of a fixed asset is accumulated depreciation.
Understanding a Contra Asset Account
Contra accounts are accounted on the same financial statement as the related account. For instance, a contra account to accounts receivable, frequently known as allowance for doubtful accounts, is a contra asset account.
This kind of account can be known as the allowance for doubtful accounts or bad debt reserve. The balance in the allowance for doubtful accounts signifies the dollar amount of the current accounts receivable balance that is anticipated to be uncollectible. The amount is recounted on the balance sheet in the asset section directly below accounts receivable. The net of these two figures is characteristically reported on a third line.
Accountants make use of contra accounts instead of reducing the value of the original account directly to retain financial accounting records clean. If a contra account is not used, it can be problematic to regulate historical costs, which can make tax preparation more challenging and inefficient.
Types of Contra Accounts
There are four main kinds of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra asset accounts comprise allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are documented with a credit balance that reduces the balance of an asset.
A crucial example of contra liabilities comprise discount on notes or bonds payable. Contra liabilities grasp a debit balance. Contra liability accounts are not as prevalent as contra asset accounts.
A liability that is documented as a debit balance is used to reduce the balance of a liability. The balance of a contra liability account stays as a debit balance. This account diminishes the value of the liability. Contra Liability a/c is not used as generally as contra asset accounts. It is not categorized as a liability since it does not symbolize a future compulsion.
The third contra kind is contra equity. These contras decrease the equity account and convey a debit balance. Contra equity lessens the complete number of outstanding shares on the balance sheet. The important example of a contra equity account is Treasury stock, which characterizes the amount paid to buy back stock
And, for contra revenue accounts, there are sales discounts, sales allowances, or sales returns. Contra revenue decreased gross revenue, consequential in net revenue. These contra revenue accounts are inclined to have a debit balance.
The Bottom Line
Contra accounts are used to decrease the original account directly, maintaining financial accounting records clean. This facilitates the easy regulation of historical costs. This is particularly significant for contra asset accounts. The dissimilarity between an asset’s balance and the contra account asset balance remains the book value.