After each accounting period, the company records a depreciation expense of the asset. Allowance for receivables is an account that companies maintain to record possible bad debts. However, this account does not represent actual irrecoverable debts.

Accounts receivable is rarely reported on the balance sheet at its net amount. Instead, it is reported at its full amount with an allowance for bad debts listed below it. Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet.

What are Contra Accounts?

Specifically, it is contra to shareholders’ equity because it decreases the total shareholders’ equity on the balance sheet. Sometimes, the current value of https://accounting-services.net/accounting-for-startups-the-ultimate-startup/ a note receivable will fall compared to its face value. This process will give rise to a contra asset account which is the discount on notes receivables.

Contra asset accounts are necessary for companies for various reasons. The most prominent of these include allowing companies to present a more accurate picture of their assets. For example, after six years, the asset’s book value on the balance sheet will be $40,000.

Contra Account Definition in Accounting

By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount. Balance sheet readers cannot only see the actual cost of the item; they How to account for grant in nonprofit accounting can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset. In essence, contra-asset accounts have a negative balance while other asset accounts have a positive balance.

Learn why contra accounts, when utilized correctly along with a paired account, are a crucial component of accurate accounting and financial review. 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. Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost. The definition can be expanded to include contra accounts in general.

What Is a Contra Asset?

Accounts Receivable is an asset account that represents the amount of money due to a business for goods or services that have been delivered or used but not yet paid for by customers. Therefore, these companies must maintain an obsolete inventory reserve account to net off any unusable stock from the account. This requirement also comes from the accounting standard for inventories. If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts.

• Contra asset accounts are useful tools in double-entry accounting.
• Contra accounts are a significant part of a company’s financial statements.
• For example, if an account has a debit balance, a contra account will have a credit balance.
• Contra asset accounts are, as the name implies, accounts that are contrary to popular belief.
• In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000.
• The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible.