Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Therefore, a contra asset can be regarded as a negative asset account. Offsetting the asset account with its respective The Basics of Nonprofit Bookkeeping contra asset account shows the net balance of that asset. Even small businesses benefit immensely from contra asset accounts. A debit will be made to the bad debt expense for $4,000 to balance the journal entry.

• Sometimes, the current value of a note receivable will fall compared to its face value.
• The most common contra equity account is called “treasury stock.” This special account decreases the number of shares outstanding in the market because the company repurchases some of the shares from its buyers.
• This account helps companies present a more accurate accounts receivable balance on the financial statements.
• 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.
• The contra liability account is less common than the contra asset account.

Obsolete inventory accounts are very important in dealing with this, especially when many smaller businesses struggle with obsolete assets regularly. The importance of contra asset accounts is generally to reduce the value of some related account. The contra asset account pulls the value of the combined accounts down, which in turn decreases the value of the second account as well, which is a normal account. Contra asset accounts are asset accounts where the balance is a credit balance.

Benefits of Contra Accounts

Similarly, allowance for receivables will pair with accounts receivable balances. These balances cannot offset asset accounts that do not relate to them. While tracking contra asset accounts is cumbersome for bookkeepers and accounting clerks using manual accounting systems, if you’re using accounting software you’ll find that most of the heavy lifting is done for you.

By recording reductions in a separate account, companies can get better insights into their actual accounts. A company, https://www.wave-accounting.net/accounting-for-in-kind-donations-to-nonprofits/ ABC Co., purchased a depreciable asset worth $100,000. The company expects the asset to have a useful life of 10 years.

Contra Account Definition, Types, and Example

Both of these accounts offset each other to represent a net balance on a company’s balance sheet. Contra assets may be stated in separate line items on the balance sheet. Or, if they contain relatively minor balances, they may be aggregated with their paired accounts and presented as a single line item in the balance sheet. In either case, the net amount of the pair of accounts is referred to as the book value of the asset account in question.

This allows the financial analyst to evaluate the company inventory’s current market value. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. Notes receivables are promissory notes that include a promise from a borrower to repay a lender. For companies, these represent receivables from various parties.

How Are Contra Accounts Reported in Financial Statements?

The most common contra equity account is called “treasury stock.” This special account decreases the number of shares outstanding in the market because the company repurchases some of the shares from its buyers. Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks. The natural balance of a contra asset account, in this case, is exactly the opposite of the balance of the related account.

• Both these aspects of the transaction are although entered in the same account, are mentioned in separate columns.
• 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.
• There are three contra asset accounts that commonly appear in an organization’s chart of accounts.
• The company expects the asset to have a useful life of 10 years.

Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values. Both these aspects of the transaction are although entered in the same account, are mentioned in separate columns. The allowance for these doubtful accounts can ultimately result in the total number of receivables. Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent.