Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra liabilities reduce liability accounts and carry a debit balance. Contra equity accounts carry a debit balance and reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance. Contra asset accounts include allowance for doubtful accounts and the accumulated depreciation.

Types of Contra Accounts – Explanation

The difference is depreciated evenly over the years of the expected life of the asset. In other words, the depreciated amount expensed in each year is a tax deduction for the company until the useful life of the asset has expired. Accumulated amortization and accumulated depletion work in the same way as accumulated depreciation; they are all contra-asset accounts.

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• For example, in the current example both straight-line and double-declining-balance depreciation will provide a total depreciation expense of $48,000 over its five-year depreciable life.
• It is difficult to determine an accurate fair value for long-lived assets.
• They help state the true value for the asset; an important consideration when making year-end tax deductions and when a company is being sold.
• Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts.

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This entry indicates that the account Depreciation Expense is being debited for $10,000 and the account Accumulated Depreciation is being credited for $10,000. Assume that on January 1, 2019, Kenzie Company bought a printing press for $54,000. Kenzie pays shipping costs of $1,500 and setup costs of $2,500, assumes a useful life of five years or 960,000 pages.

What Is A Contra Asset Account?

Contra asset accounts provide business owners with the true value of certain asset accounts. For example, let’s say your accounts receivable balance is currently $11,500, but you’re not entirely sure that you’ll be able to collect the entire balance due. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete.

• Contra revenue accounts reduce revenue accounts and have a debit balance.
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• The difference between an asset’s account balance and the contra account balance is known as the book value.
• When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value.
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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. The account Allowance for Doubtful Account is credited when the account the contra account used to record depreciation is depreciation Bad Debts Expense is debited under the allowance method. The use of Allowance for Doubtful Accounts allows us to see in Accounts Receivable the total amount that the company has a right to collect from its credit customers.

Is Accumulated Depreciation Equal to Depreciation Expense?

The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment. The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company.

• Companies must be consistent in how they record depreciation for assets owned for a partial year.
• Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset.
• Accumulated depreciation is presented in the balance sheet and reduced from the gross amount of fixed tangible assets to derive the net value of the asset.
• By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount.
• They are used in case some customers won’t be able to pay the money they owe to the business.

A loan doesn’t deteriorate in value or become worn down over use like physical assets do. Loans are also amortized because the original asset value holds little value in consideration for a financial statement. Though the notes may contain the payment history, a company only needs to record its currently level of debt as opposed to the historical value less a contra asset. The term depreciate means to diminish in value over time, while the term amortize means to gradually write off a cost over a period.

• Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete.
• The accumulated depreciation account is perhaps the most common contra asset account used by business owners.
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• An example of a contra liability account is the bond discount account, which offsets the bond payable account.
• Writing off your obsolete inventory in this manner allows you to expense the cost of the obsolete inventory while also decreasing your current inventory balance using the contra asset account.

The building is expected to be useful for 20 years, with a value of $10,000 at the end of the 20th year. This first criterion means that the car will have a net value or book value of $0 once it is fully depreciated. Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock. Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at Scale Venture Partners, focused on technology.

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. Both the asset account Truck and the contra asset account Accumulated Depreciation – Truck are reported on the balance sheet under the asset heading property, plant and equipment.