In this case, you will debit your asset by $8,00,000 and you will reduce the balance of the asset account by $8,000. Hence in this case depreciation account is reducing the balance of the asset account. Therefore, a depreciation account is known as a 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, https://www.wave-accounting.net/ along with any factor that has reduced that amount. Learn about the meaning of contra accounts, how and why they are used, and how to account for balances with them. The amount in the accumulated depreciation account is deducted from the assets of a company, such as buildings, vehicles and equipment. This can help anyone viewing the financial information to find the historical cost of the asset.
- 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.
- Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts.
- He is a professor of economics and has raised more than $4.5 billion in investment capital.
- These contras reduce the equity account and carry a debit balance.
If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming. In the direct write-off method, bad debt expense is charged when these are incurred. The accounting entry for this is debit, bad debt expense and credit to accounts receivable. Here, accounts receivable are decreased in the period when bad debt expense is incurred. However, bad debt expense can arise to the sales made in earlier periods. If a listed company purchases its own shares from the open market, it will have to debit the treasury stock account in order to record the transaction. A company might decide to purchase its stock when the board of directors feel the stock is undervalued or when it wishes to pay its shareholders dividends.
What is a contra asset account?
Companies may use a financial statement disclosure to identify and describe the use of a contra asset account. For example, the allowance for doubtful accounts indicates money owed from customers a company does not expect to receive. There can be multiple reasons why the company does not expect to receive this owed money.
- The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet.
- Allowance for doubtful debt is a contra account against which bad debts are charged.
- Contra LiabilityA contra liability is a liability account that carries a debit balance as opposed to a credit balance.
- A treasury stock is an example of a contra equity account that reduces the amount of total equity.
- There are many situations where one account 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. When recording assets, the difference between the asset’s account balance and the contra account balance is the book value of the asset. 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.
Types of contra accounts
The use of Allowance for Doubtful Accounts allows us to see in Accounts Receivable the total amount that the company has a right to collect from its credit customers. The credit balance in the account Allowance for Doubtful Accounts tells us how much of the debit balance in Accounts Receivable is unlikely to be collected. 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. The contra asset account then allows recording of the value factoring in depreciation. For instance, you buy a car worth $8,00,000 and you will depreciate it by $8,000 per year for the normal wear and tear of the car.
The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. The amount is reported on the balance sheet in the asset section immediately below accounts receivable.