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What is Contra Account? Definition + Journal Entry Examples

Because contra assets simply detract from the total value of the asset account, all one has to do is add up all the assets together first. Finally, take the total of depreciation and subtract it from total assets. Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset. Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc.

What is the meaning of contra asset account?

In bookkeeping, a contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit (negative) balance. The account offsets the balance in the respective asset account that it is paired with on the balance sheet.

A contra liability is an account in which activity is recorded as a debit balance is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as contra asset accounts. It is not classified as a liability since it does not represent a future obligation.

Contra asset account definition

There are two major methods of determining what should be booked into a contra account. A contra account is an account that is used to offset another account. The balance in the contra account is reduced when the corresponding What is a Contra Asset Account – Definition and Example asset or liability it is paired with is disposed of. If a listed company purchases its own shares from the open market, it will have to debit the treasury stock account in order to record the transaction.

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. 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.

The Struggles of Private Company Accounting

Contra revenue accounts reduce revenue accounts and have a debit balance. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities include discount on notes or bonds payable. Contra liability accounts are not as popular as contra asset accounts.

  • Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts.
  • There are two major methods of determining what should be booked into a contra account.
  • In order to balance the journal entry, a debit will be made to the bad debt expense for $4,000.
  • The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold.
  • These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances.