Can you explain me ‘contra asset’ account in accounting in the most simplest way possible?

contra assets

In addition, this accounting process prevents the large swings in operating results when uncollectible accounts are written off directly as bad debt expenses. Recording depreciation on plant assets affects the balance sheet and the income statement. Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets.

  • The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible.
  • Contra accounts are shown in the financial statements below the paired accounts, although sometimes the balances of the two accounts are merged to a net amount for presentation purposes.
  • Why would a company buy some of its stock from its buyers?
  • Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete.

Writing off your obsolete inventory in this manner allows you to expense the cost of the obsolete inventory while also decreasing your current inventory balance using the contra asset account. Including contra revenue accounts is important in the income statement because it shows the original amount of sales the firm has made, along with any factor that has reduced that amount. Contra liability accounts are special accounts in the liabilities section of the balance sheet. They aim to reduce the balance of some related liability accounts. This would let users of the financial statements calculate the book value of the liability.

What Is a Contra Asset?

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. Offsetting the asset account with its respective contra contra assets asset account shows the net balance of that asset. Let’s say you have a truck worth $20,000 that will last five years. If you depreciated it evenly you would take $20,000, divide it by 5 and expense $4,000 each year.

Its purpose includes selling the asset to another business unit, merger and acquisition. The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. A contra account is an account used in a general ledger to reduce the value of a related account. Whether reported as separate lines on the financial report or as a cumulative value, the net amount of the pair of accounts is called the “net book value” of the individual asset.

Accounting Dictionary

At the same time, depreciation for the van at the end of the year ended up at $500. Then the depreciation for the building ended up at $20,000. And the depreciation for the office equipment ended up at $1,000. When examining the term “contra asset account,” look no further than the root of contra to get a vague grasp of the definition. Because contra means “against,” one could quickly conclude that a contra asset account is going to be an account that goes against the regular asset account on the Balance Sheet.

Is a contra asset a liability?

A contra asset account is not classified as an asset, since it does not represent long-term value, nor is it classified as a liability, since it does not represent a future obligation.

If the company repays the loan early, the lender may provide a discount. This discount is subtracted from the total amount borrowed to better reflect the discount given by the lender. The discount on bonds payable amount shows the difference between the amount of cash received when issuing a bond and the value of the bond at maturity.

Overview of contra accounts

By the end of 2nd-year, the machinery balance will still be $100,000, and accumulated depreciation will show $40,000. 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 method helps a third person identify what the book value was at the time of purchase and the remaining value of an asset. If we show $60,000 as an asset in the third year, it will be challenging to understand whether $60,000 is all new purchases or the remaining value of an asset.

contra assets

Is depreciation a contra asset?

Accumulated depreciation accounts are asset accounts with a credit balance (known as a contra asset account). It is considered a contra asset account because it contains a negative balance that intended to offset the asset account with which it is paired, resulting in a net book value.

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