contra-asset account meaning of contra-asset account in Longman Dictionary of Contemporary English

Therefore, an example of a contra asset account involved with a depreciation situation seems reasonable to observe. Nova Incorporated is attempting to finalize their balance sheet in terms of the net value of their assets. At the end https://time.news/how-can-retail-accounting-streamline-your-inventory-management/ of the year, their assets are as follows… Nova Company valued a van at $30,000, an office building at $500,000 and office equipment at $20,000. At the same time, depreciation for the van at the end of the year ended up at $500.

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Usually, companies add to the accumulated depreciation account after every accounting period. The accumulated depreciation account plays a vital role in representing the accurate value of an asset in the financial statements. Treasury stock and drawing accounts are examples of contra equity accounts. Transactions made to contra accounts are presented on a company’s financial statements under the related account. Contra accounts are important because they allow a company to follow the matching principle by recording an expense initially in the contra asset account. The contra asset account is later reduced when the expense is recorded.

The book value of an asset is the value of the asset recorded in the company’s balance sheet. Contra accounts are needed for determining the book value of assets held by a company. For accounting purposes, the book value is realized by the difference between the asset’s account balance and contra account balance. Contra accounts play a major role in estimating the book value of an asset.

Limited-Life Impairment

The above accounts are the standard items that a company’s financial statements will include. However, there are other items as well that may not show in those financial statements. For example, an asset was purchased by a company for $100,000 – that is, the historical cost of the asset was $100,000 – and its contra asset counterpart has a balance of $30,000. A contra asset account is one that tracks a value that decreases the value of assets.

A company creates allowances for doubtful accounts to record the portion of accounts receivable which it believes it will no longer be able to collect. The amount in allowance for doubtful accounts is deducted from the accounts receivable account of a company. A contra account is a general ledger account with a balance that is the opposite of another, related account that it is paired with. The asset’s balance is reduced by the impairment amount to reflect the asset’s new economic value and the account remains on the balance sheet. Unlike a regular disposal of an asset, where the asset is abandoned and written off the accounting records, an asset disposal sale involves a receipt of cash or other proceeds. In accounting, intangible assets are defined as non-monetary assets that cannot be seen, touched or physically measured.

What Is a Contra Account?

Contra asset accounts help companies to record any reductions to their non-current and current assets. By doing so, they can bring their asset accounts to a more accurate position. For example, after six years, the asset’s book value on the balance sheet will be $40,000. However, it will also have a negative accumulated depreciation of $60,000, offsetting that cost. Any company that owns intangible assets such as software, patent, etc., will maintain an accumulated amortization account.

• Allowance for obsolete inventory or obsolete inventory reserve are also examples of contra asset accounts.
• While accumulated depreciation is the most common contra asset account, the following also may apply, depending on the company.
• The contra asset account, accumulated depreciation, is always a credit balance.
• The amount of gross revenue minus the amount recorded in the contra revenue accounts equal a company’s net revenue.
• That is because some of the bonds are issued at a discount, so this reduces the balance of their bonds payable.

A contra asset is a negative asset account that offsets the asset account with which it is paired. The purpose of a contra asset account is to store a reserve that reduces the balance in the paired 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.

Contra accounts increase transparency

Assets are the things a business has that it uses to generate income and are accounted for by dividing them up into short-term and long-term assets. Short-term assets like inventory or cash are meant to be used in the course of a year while long-term assets include items held for the long-term like equipment or land. If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts. Contra accounts are used to help a company report the original amount of a transaction as well as reductions that may have happened.

For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. Accumulated amortization is an account similar to accumulated depreciation. This account real estate bookkeeping only relates to a company’s intangible assets rather than tangible. At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset.

What are the types of Contra Asset Accounts?

When a contra asset account is not stated separately in the balance sheet, it may be worthwhile to disclose the amount in the accompanying footnotes, where readers can readily see it. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns.