What is a contra asset account?

A contra asset is (C.) an asset account with a credit balance. Thus, it reduces the overall amount of assets. Revenue AccountRevenue accounts are those that report the business’s income and thus have Contra Asset Account credit balances. Revenue from sales, revenue from rental income, revenue from interest income, are it’s common examples. Contra EquityA contra equity account has a debit balance instead of a credit.

When a good is sold on credit, the amount receivable from customers is shown under the debtor’s balance sheet balance. It is a standard business practice to prepare an estimate for the amount likely to go bad. This amount is shown as a provision or reserve for doubtful debts.

Contra Asset

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. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. In this way, the historical cost, the amount of write-off, and the book value of an asset can always be seen on the balance sheet.

It can retire the shares, meaning that they will no longer be existent on the company’s financial statements as treasury stock. For example, an asset was purchased by a company for $100,000 – that is, the historical cost of the asset was $100,000 – and its contra asset counterpart has a balance of $30,000. Therefore, the asset’s net value will be $70,000. Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost.

Presentation of Contra Assets

When a company buys back its own shares from the open market, it records the transaction by debiting the treasury stock account. A company may decide to buy back its shares when management feels the stock is undervalued or because it desires to pay stock dividends to its shareholders. Taking into account the list of contra asset accounts, how would you calculate the net value of assets? If the example looks difficult, rest assured the solution is very simple. Because contra assets simply detract from the total value of the asset account, all one has to do is add up all the assets together first.

• This allows the net amount to also be reported.
• Here is an example of adepreciation journal entry.
• By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes.
• Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance.
• Learn why contra accounts, when utilized correctly along with a paired account, are a crucial component of accurate accounting and financial review.

The $10,000 of depreciation will reduce the book value of the car. The company uses the straight-line depreciation method for the car. Accumulated depletion is the counterpart of natural https://bookkeeping-reviews.com/ resource assets. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. If you stock a limited amount of inventory, you could probably do without it.

Contra Asset Journal Entry Accounting

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