Contra Account Definition Example Essays

A contra asset is a negative asset account that offsets the balance in 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.

The natural balance in a contra asset account is a credit balance, as opposed to the natural debit balance in all other asset accounts. There is no reason for there to ever be a debit balance in a contra asset account; thus, a debit balance probably indicates an incorrect accounting entry. When a contra asset transaction is created, the offset is a charge to the income statement, which reduces profits.

The proper size of a contra asset account can be the subject of considerable discussion between a company controller and the company's auditors. The auditors want to ensure that reserves are adequate, while the controller is more inclined to keep reserves low in order to increase the reported profit level. Thus, the resulting contra asset balances can be negotiated figures.

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.

For example, the allowance for doubtful accounts is a contra asset account, and it is paired with the trade accounts receivable account. When combined, the two accounts show the net amount of cash expected to be received from outstanding accounts receivable.

As another example, the accumulated depreciation account is a contra asset account, and it is paired with the fixed assets account. When combined, the two accounts show the net book value of a company's fixed assets.

Note: It is customary to have one accumulated depreciation account and multiple fixed asset accounts with which it is linked.

Examples of other contra assets are:

  • Accumulated depletion
  • Reserve for obsolete inventory

These additional accounts are less commonly used.

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Define Contra Asset Account

Contra means against. In bookkeeping terms, a contra asset account refers to an account which is offset against an asset account.

As an asset account is normally a debit balance, a contra asset account will normally be a credit balance. When the two balances are offset against each other they show the net balance of both accounts.

Contra asset accounts are useful when in bookkeeping terms a business needs to keep the two accounts separate so as not to lose information, but for presentation reasons in the financial statements, it is necessary to offset them against each other and show a net balance.

Contra Asset Account Examples

The two most common examples of contra asset accounts are the accumulated depreciation contra account, and the allowance for doubtful debts contra account.

Accumulated Depreciation is a Contra Asset Account

The accumulated depreciation contra asset account records the depreciation to date of a fixed asset. The account is normally a credit balance and in use is offset against the fixed asset account which is normally a debit. The net balance of the two accounts shows the net book value of the fixed asset. Using the two accounts, allows information about the original cost of the fixed asset to be maintained on the fixed asset account, and details of the depreciation of the asset to be maintained on the accumulated depreciation contra asset account

In the trial balance the accounts would appear as follows.

AccountDebitCreditNotes
Fixed assets4,000Asset account
Accumulated depreciation3,000Contra asset account
…..

In the financial statements the asset account would be offset against the contra asset account to show the net balance.

Fixed assets4,000Asset account
Accumulated depreciation3,000Contra asset account
Net book value1,000Net balance after offset

Allowance for Doubtful Accounts is a Contra Asset Account

The allowance for doubtful debts contra asset account records the allowance for doubtful debt provision to date of an accounts receivable. The account is normally a credit balance and in use is offset against the accounts receivable account which is normally a debit. The net balance of the two accounts shows the net realizable value of the accounts receivable. Using the two accounts, allows information about the original value of the accounts receivable to be maintained on the accounts receivable account, and details of the allowance for double debts of the asset to be maintained on the allowance for doubtful accounts contra asset account

In the trial balance the accounts would appear as follows.

AccountDebitCreditNotes
Accounts receivable account6,000Asset account
Allowance for doubtful debts account1,000Contra asset account
…..

In the financial statements the asset account would be offset against the contra asset account to show the net balance.

Accounts receivable6,000Asset account
Allowance for doubtful debts account1,000Contra asset account
Net book value5,000Net balance after offset

Contra asset accounts are the most commonly encountered, however, a business can also have other forms of contra accounts including:

  • Contra revenue account – for example, sales returns and allowances account.
  • Contra equity account – for example, owner’s drawings account, treasury stock account
  • Contra liability account – for example, discount on bonds payable account
  • Contra expense account – for example, expense reimbursement by employees account

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