The figure for accumulated depreciation can be located on a company’s balance sheet below the line for related capitalized assets. Although they all aim at reducing the balance of some type of account, it is useful to have some general foundational knowledge of the different types of accounts. Sometimes, it is important to keep the original balance of the accounts and create the contra accounts to be able to calculate the net value of the account.

Deciding on a Depreciation Method

• The units-of-production depreciation method bases depreciation on the actual usage of the asset, which is more appropriate when an asset’s life is a function of usage instead of time.
• The sum-of-the-years-digits is different from the two above methods in that while those methods are based on time factors, the sum-of-the-years-digits is based on usage.
• To make the topic of Depreciation even easier to understand, we created a collection of premium materials called AccountingCoach PRO.
• Osman has a generalist industry focus on lower middle market growth equity and buyout transactions.
• The annual depreciation expense shown on a company’s income statement is usually easier to find than the accumulated depreciation on the balance sheet.
• In other words, the contra liability account is used to adjust the book value of an asset or liability.
• Accumulated depreciation is usually not listed separately on the balance sheet, where long-term assets are shown at their carrying value, net of accumulated depreciation.

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. These assets are often described as depreciable assets, fixed assets, plant assets, productive assets, tangible assets, capital assets, and constructed assets. As with the straight-line example, the asset could be used for more than five years, with depreciation recalculated at the end of year five using the double-declining balance method.

How to Use Contra Asset Accounts

For example, the machine in the example above that was purchased for $500,000 is reported with a value of $300,000 in year three of ownership. Again, it is important for investors to pay close attention to ensure that management is not boosting book value behind the scenes through depreciation-calculating tactics. But with that said, this tactic is often used to depreciate assets beyond their real value. Watch this short video to quickly understand the main concepts covered in this guide, including what accumulated depreciation is and how depreciation expenses are calculated. Financial analysts will create a depreciation schedule when performing financial modeling to track the total depreciation over an asset’s life.

What are the Five Types of Contra Accounts?

• “Accumulated Depreciation” is the contra account used to record depreciation.
• Accumulated depreciation is a measure of the total wear on a company’s assets.
• In the above example, the debit to the contra liability account of $100 lets the company recognize that the bond was sold at a discount.
• Accountants need to analyze depreciation of an asset over the entire useful life of the asset.

The credit balance in the account Allowance for Doubtful Accounts tells us how much of the debit balance in Accounts Receivable is unlikely to be collected. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. A debit will be made to the bad debt expense for $4,000 to balance the journal entry. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000.

Accumulated Depreciation

To illustrate an Accumulated Depreciation account, assume that a retailer purchased a delivery truck for $70,000 and it was recorded with a debit of $70,000 in the asset account Truck. Each year when the truck is depreciated by $10,000, the accounting entry will credit Accumulated Depreciation – Truck (instead of crediting the asset account Truck). This allows us to see both the truck’s original cost and the amount that has been depreciated since the time that the truck was put into service. In this section, we concentrate on the major characteristics of determining capitalized costs and some of the options for allocating these costs on an annual basis using the depreciation process. In the determination of capitalized costs, we do not consider just the initial cost of the asset; instead, we determine all of the costs necessary to place the asset into service. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns.

• In our example, the total depreciation will be $48,000, even though the sum-of-the-years-digits method could take only two or three years or possibly six or seven years to be allocated.
• Accumulated depreciation is subtracted from the historical cost of the asset on the balance sheet to show the asset at book value.
• There are two major methods of determining what should be booked into a contra 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.

Each year, the accumulated depreciation balance increases by $9,600, and the press’s book value decreases by the same $9,600. At the end of five years, the asset will have a book value of $10,000, which is calculated by subtracting the accumulated depreciation of $48,000 (5 × $9,600) from the cost of $58,000. Accumulated depreciation is the total amount of depreciation of a company’s assets, while depreciation expense is the amount that has been depreciated for a single period. Depreciation is an accounting entry that represents the reduction of an asset’s cost over its useful life. For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets.

Is a Contra Account a Debit or Credit?

Accumulated depreciation specifies the total amount of an asset’s wear to date in the asset’s useful life. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book the contra account used to record depreciation is depreciation value. Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements. Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares.

Examples of Contra Accounts

At the end of three years the truck’s book value will be $40,000 ($70,000 minus $30,000). Income statement accounts are referred to as temporary accounts since their account balances are closed to a stockholders’ equity account after the annual income statement is prepared. The balance in the Equipment account will be reported on the company’s balance sheet under the asset heading property, plant and equipment. Depreciation is necessary for measuring a company’s net income in each accounting period.

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. Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory. Generally speaking, there is accounting guidance via GAAP on how to treat different types of assets. Accounting rules stipulate that physical, tangible assets (with exceptions for non-depreciable assets) are to be depreciated, while intangible assets are amortized.