Contra Asset: What It Is and How a Contra Asset Account Works

what is a contra asset

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. For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately. The first step in accounting for the allowance for doubtful accounts is to establish the allowance. This is done by using one of the estimation methods above to predict what proportion of accounts receivable will go uncollected. For this example, let’s say a company predicts it will incur $500,000 of uncollected accounts receivable.

what is a contra asset

The funds had been held in a South Korean bank under a mechanism that allowed Iran to keep selling oil to South Korea and several other countries. The officials insist there are already several safeguards to ensure the money is not misused, including monitoring by the U.S. Any approved withdrawal for goods such as food, medicine and agricultural equipment would be monitored by both entities, officials said.

Allowance for doubtful accounts

Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. When researching companies, the financial statement is a great place to start. Get instant access to video lessons taught by experienced investment bankers.

what is a contra asset

Contra asset accounts also provide a clear picture of the companies’ accumulation of assets. Similarly, these accounts can also be essential in various calculations. For example, after six years, the asset’s book value on the balance sheet will be $40,000.

What are the types of Contra Asset Accounts?

Since it is a contra asset account, this allowance account must have a credit balance (which is contrary to the debit balances found in asset accounts). The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable. Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000. Contra asset accounts are a type of contra account that net off against asset accounts. These include accumulated depreciation, accumulated amortization, allowance for receivables, obsolete inventory, and discount on notes receivables. A contra account is a negative account that is netted from the balance of another account on the balance sheet.

Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete. Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods. In this scenario, a write-down is recorded to the reserve for obsolete inventory.

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Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant What is Legal Accounting Software For Lawyers for more than 25 years. He is the sole author of all the materials on

  • This type of account could be called the allowance for doubtful accounts or a bad debt reserve.
  • On the other hand, accumulated depreciation is a contra-asset account.
  • This is because the expense was already taken when creating or adjusting the allowance.
  • Whenever the balance of a contra asset account increases (credit to the contra asset account), the increased amount is written off as an expense and is reported in the company’s income statement.
  • There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue.
  • 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.

The accounting entries for a discount on notes receivables are as follows. Any company that owns intangible assets such as software, patents, etc., will maintain an accumulated amortization account. Similar to depreciation, this account plays a significant role in representing the book value of a company’s assets. Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers. The amount is not reported, and the net sales amount is reported on the income statement. In footnote 3, the company reports, «Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021.»


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