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. A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger.
These balances cannot offset asset accounts that do not relate to them. Although contra asset accounts have credit balances, they do not appear in liabilities or equity. Usually, credit balances include items from one of those two natures. Therefore, contra asset accounts differ from other accounts that have a credit balance. By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company. Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset.
How are Contra Accounts Used and Reported?
When a company gives a discount to customers in an effort to convince them to buy its goods or services, it is recorded in the discount on sales account. Assets are permanent or real accounts which are presented as part of the Becoming a Certified Bookkeeper: Step-by-Step Career Guide balance sheet. These ref to the resources owned by the company which arose from the incurrence of a liability or contribution from owners. This accumulated depreciation account would continue until the asset is disposed of.
- The accounting entries for accumulated amortization are as follows.
- For example, accumulated depreciation will go along with related assets.
- However, there are other items as well that may not show in those financial statements.
- To account for this potential loss, GreenThumb creates a contra asset account called “Allowance for Doubtful Accounts” with a credit balance of $1,200 (3% of $40,000).
- All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
- Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting.
- A contra asset is a negative asset account that offsets the asset account with which it is paired.
Similarly, these accounts can also be essential in various calculations. As mentioned, companies do not represent these accounts on the balance sheet. However, they will still appear on the notes to the financial statements with necessary disclosures.
Overview of Contra Asset Account
One common example is accumulated amortisation, which is a contra-asset account. This means that it acts in the opposite manner of a regular asset account. In a balance sheet, accumulated depreciation would https://adprun.net/what-to-expect-from-accounting-or-bookkeeping/ be reflected as a reduction from the asset’s account so that the net balance is evident. This results in compliance with the accrual concept while reflecting on an accurate accounts receivable balance.
In the balance sheet, the accounts receivable would be reflected after adjusting this allowance account. If it is the first year of operation, there is no outstanding balance in the allowance account. The accounting entries for a discount on notes receivables are as follows. Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a credit
- Published in Bookkeeping