Contra liability accounts are typically used for bonds, notes payable, and other indebtedness. Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost. 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. A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity).

Hopefully, you have a pretty clear idea of contra asset meaning—no need to ask to define contra asset accounts anymore. Including contra asset accounts on your balance sheets can be hugely beneficial for your business. Both the asset and the corresponding contra asset accounts must be stated clearly in the balance sheet.

Types of Contra Assets

Accumulated depreciation reflects the reduction in value of a fixed asset. Contra liability accounts are less commonly used than contra asset accounts. Contra liability accounts Importance of Accounting for Startups are mainly used by corporations that issue bonds frequently. That is because some of the bonds are issued at a discount, so this reduces the balance of their bonds payable.

For example, a company might have a contra asset account for depreciation expense and a separate asset account for equipment cost. 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.

Allowance for Doubtful Accounts

Therefore, for these three, the debit balance actually represents a negative amount. There are three contra asset accounts that commonly appear in an organization’s chart of accounts. It is paired with the trade accounts receivable account, and contains a reserve for receivables that are unlikely to be paid by customers. By combining the balances in these two accounts, one can determine the net amount of receivables that the reporting entity expects to receive. The size of the reserve also reveals the amount of bad debt that the company expects to experience from the current set of receivables. A contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability.

After each accounting period, the company records a depreciation expense of the asset. The accounting entries for the transaction will be as follows. However, there are Florida State Tax: 2023 Rates, Who Has to Pay some prevalent contra-asset accounts that may exist for all companies. A contra account is an account that companies use to reduce the value of a related account.

Contra accounts definition

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. Equipment is a long-term asset account that has a debit balance. This https://1investing.in/basic-accounting-tips-for-churches-and-nonprofits/ depreciation is saved in a contra asset account called accumulated depreciation. The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment.

• Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.
• Similarly, allowance for receivables will pair with accounts receivable balances.
• There are several examples of contra accounts, including accumulated depreciation, accumulated depletion, accumulated amortization, allowance for receivables, etc.
• Both of these accounts offset each other to represent a net balance on a company’s balance sheet.