The entry to remove the asset and its contra account off the balance sheet involves decreasing the asset’s account by its cost and decreasing the accumulated depreciation account by its account balance. Contra Equity Account – A contra equity account has a debit balance and decreases a standard equity account. Treasure stock is a good example as it carries a debit balance and decreases the overall stockholders’ equity. Also, with IFRS asking to report it in a particular way, the accountants must be updated with recent changes to how the contra assets account should appear in the books of accounts. Far less common is the obsolete inventory reserve, which reduces the overall inventory value on the balance sheet.
INVESTMENT BANKING RESOURCESLearn the foundation of Investment banking, financial modeling, valuations and more. Globally Accepted Accounting PrinciplesGAAP are standardized guidelines for accounting and financial reporting. Provision for a discount from creditors and discount on bills receivable are other widely used examples.
What is a Contra Asset Account?
By stating this information separately in a contra asset account, a user of financial information can see the extent to which a paired asset should be reduced. A less common example of a contra asset account is Discount on Notes Receivable. The credit balance in this account is amortized or allocated to Interest Income or Interest Revenue over the life of a note receivable. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance.
- In other words, contra accounts are used to reduce normal accounts on the balance sheet.
- Provision for a discount from creditors and discount on bills receivable are other widely used examples.
- Its purpose includes selling the asset to another business unit, merger and acquisition.
- Notes receivable are considered current assets if they are to be paid within 1 year and non-current if they are expected to be paid after one year.
- The account offsets the balance in the respective asset account that it is paired with on the balance sheet.
Therefore, https://quick-bookkeeping.net/ equity accounts have a debit balance to offset their corresponding equity balances. However, some asset accounts need a negative counterpart to reduce the balance of that account. The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance. 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.
Contra Asset Journal Entry Accounting
This means that it acts in the opposite manner of a regular asset account. A contra account is used in order to better portray the relationship between certain debits and credits within the overall financial structure of an entity. A contra account can be used to remedy an error, to track depreciation of an asset, or to register payments that are not collectible.
What are examples of contra accounts?
“Examples of contra accounts include allowance for doubtful accounts, reserve for obsolete inventory, and accrued liabilities. Each of these accounts helps to offset another account on the balance sheet.
For instance, the allowance for doubtful accounts reduces the net amount of accounts receivable, while the reserve for obsolete inventory does the same for inventory. Similarly, accrued liabilities reduce the total amount of current liabilities.”
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Discount on Notes Receivable
Including contra revenue accounts is important in the income statement because it shows the original amount of sales the firm has made, along with any factor that has reduced that amount. Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks. Note that the contra liability account has a positive balance , and the liability account normally has a credit balance. Hence, the book value of the liability will be the credit balance of the liability account minus the debit balance of its contra liability counterpart. Contra liability accounts are special accounts in the liabilities section of the balance sheet. This would let users of the financial statements calculate the book value of the liability.