A contra asset account example is an accumulated depreciation account that will help the company track and offset fixed assets. The company has a contra asset account for accumulated depreciation expense and a separate asset account for equipment cost. The contra asset account would be used to offset the equipment account on the balance sheet. Contra asset accounts are useful tools in double-entry accounting.

This frequently happens to manufacturing companies that sell products with an expiration date since any inventory remaining in stock past the expiration date quickly becomes obsolete. These accounts might also appear on the balance sheets of the company. Get instant access to lessons https://turbo-tax.org/best-law-firm-accounting-bookkeeping-services-in/ taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. In other words, accumulated depreciation will be $10,000 each year until the car depreciates to $0 twenty years later.

How Contra Asset Accounts Work

No salvage value is expected at the end of the van’s useful life. Management may disclose its method of estimating the allowance for doubtful accounts in its notes to the financial statements. Companies technically don’t need to have an allowance for doubtful account. If it does not issue Accounting vs Law: Whats the Difference? credit sales, requires collateral, or only uses the highest credit customers, the company may not need to estimate uncollectability. This account serves two purposes — tracking total depreciation expenses while providing you with the accurate book value of the asset being depreciated.

For example, the contra asset account Allowance for Doubtful Accounts is related to Accounts Receivable. The contra asset account Accumulated Depreciation is related to a constructed asset(s), and the contra asset account Accumulated Depletion is related to natural resources. Contra asset accounts are, as the name implies, accounts that are contrary to popular belief. Contra asset accounts have a credit balance as compared to a debit balance that most other types of accounts have. Before we start talking about the finer details, it’s important to know what is a contra asset account.

What is a Contra Equity Account?

They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting. For instance, it is common to keep the purchase price of a piece of equipment as a historical cost in the debit asset account when it comes to fixed assets. A contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as contra asset accounts. It is not classified as a liability since it does not represent a future obligation.

The national brand gives the grocery store cash, reducing the overall cost of printing the flyer. The purpose of the Allowance for Doubtful Accounts is to track the reduction in the value of the asset while preserving the historical value of the asset. Note that if a company believes it may recover a portion of a balance, it can write off a portion of the account. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. Get instant access to video lessons taught by experienced investment bankers.

What is a Contra Account?

A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger. A contra asset account is an account in the balance sheet that offsets the balance of a regular asset account. In this case, $340 of revenue is recognised when the smartphone is delivered to the customer. This amount reflects the transaction price allocated to this performance obligation, which may not match the price stated in the contract.

There are three contra asset accounts that commonly appear in an organization’s chart of accounts. It is paired with the trade accounts receivable account, and contains a reserve for receivables that are unlikely to be paid by customers. By combining the balances in these two accounts, one can determine the net amount of receivables that the reporting entity expects to receive. The size of the reserve also reveals the amount of bad debt that the company expects to experience from the current set of receivables.

Contra Equity Account Example

The second method of estimating the allowance for doubtful accounts is the aging method. All outstanding accounts receivable are grouped by age, and specific percentages are applied to each group. The aggregate of all group results is the estimated uncollectible amount. Two primary methods exist for estimating the dollar amount of accounts receivables not expected to be collected. A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment.

• This type of account could be called the allowance for doubtful accounts or a bad debt reserve.
• If the company ceased to provide telecommunications services, the customer would not owe this amount.
• Of the $50,000 balance that was written off, the company is notified that they will receive $35,000.
• Contra asset accounts are typically used for accumulated depreciation, amortisation, and other accounting adjustments.
• The matching principle states that revenue and expenses must be recorded in the same period in which they occur.