Contra liability accounts are not as popular as contra asset accounts. The most common contra account is the accumulated depreciation account, which offsets the fixed asset account. Taken together, the asset account and contra asset account reveal the net amount of fixed assets still remaining. 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.
- As mentioned, contra asset accounts usually have a negative value which is the same as a credit balance.
- The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable.
- When a contra asset account is first recorded in a journal entry, the offset is to an expense.
- After each accounting period, the company records a depreciation expense of the asset.
- Notes receivables are promissory notes that include a promise from a borrower to repay a lender.
Whenever the balance of an account needs to be reduced in a company's ledger, it is not always applicable to credit the account if it is an asset or debit the account if it is a liability. Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts. This helps the firms to evaluate the book value of their assets and liabilities. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.
What Is A Contra Asset Account?
Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount. By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company.
Asset accounts usually have a positive value which is the same as a debit balance. Most accountants choose to record the depreciation over the useful life of an item in the accumulated depreciation contra asset account, which is a credit account. The balance sheet would show the piece of equipment at its historical cost, then subtract the accumulated depreciation to reflect the accurate value of the asset. However, some asset accounts need a negative counterpart to reduce the balance of that account.
The Contra Liability Account
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. Allowance for doubtful accounts (ADA) is a contra asset account used to create an allowance for customers who are not expected to pay the money owed for purchased goods or services. The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables. A contra-asset account is an account that opposes the balances of other asset accounts.
Why are contra asset accounts important for businesses?
The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold. Rather, it is an adjunct account or a valuation account that is added to the face value of the bonds to arrive at the carrying value (or book value) of the bonds on the balance sheet. Similarly, it allows companies to retrieve original account balances without complicated calculations.
Income Statement
Accumulated depreciation reflects the reduction in value of a fixed asset. 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. Contra liability accounts are less commonly used than contra asset accounts. Contra liability accounts are mainly used by corporations that issue bonds frequently. That is because some of the bonds are issued at a discount, so this reduces the balance of their bonds payable.