Allowance for doubtful accounts is shown as a reduction from the gross accounts receivable. The net amount of accounts receivable is presented in a balance sheet. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. In this way, the historical cost, the amount of write-off, and the book value of an asset can always be seen on the balance sheet. If two amounts are recorded on the same side of the accounting equation, the equation will no longer be in balance.

It has 3 major types, i.e., Transaction Entry, Adjusting Entry, & Closing Entry. It is prepared when there is a reduction in the value of assets due to wear and tear continuous use or when we expect that a certain percentage of accounts receivable will not be received. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. A contra account is an account used in a general ledger to reduce the value of a related account. Depreciation is not directly reduced from the asset so that the historic value/fair value of the asset could be presented in a balance sheet.

What is a Contra Account? Definition

While technically classified as an asset, it functions closer to a liability as it reduces the value of the asset it is paired with. We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R). Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting.

Most accountants choose to record the depreciation over the useful life of an item in the accumulated depreciation contra asset account, which is a credit account. The balance sheet would show the piece of equipment https://www.archyde.com/how-do-bookkeeping-and-accounting-services-affect-the-finances-of-real-estate-companies/ at its historical cost, then subtract the accumulated depreciation to reflect the accurate value of the asset. Balance sheet, users of financial statements can learn more about the assets of a company.

Is a Contra Balances Negative or Positive?

Contra asset accounts are used to track everything from depreciation expenses to returned merchandise. Learn what a contra asset is and how you can use these accounts in your small business. The entry would consist of debiting a bad debt expense account and crediting the respective accounts receivable in the sales ledger.

The contra asset account, accumulated depreciation, is always a credit balance. This balance is used to offset the value of the asset being depreciated, so as of September 1, your $8,000 asset now has a book value of $7,866.67. Writing off your obsolete inventory in this manner allows you to expense the cost of the obsolete inventory while also decreasing your current inventory balance using the contra asset account. Far less common is the obsolete inventory reserve, which reduces the overall inventory value on the balance sheet. This contra account holds a reserve, similar to the allowance for doubtful accounts. For each debit against the inventory account, there will be a corresponding credit against the obsolete inventory contra account.

A contra asset account is an account that subtracts from an asset account.

If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts. A contra account is used in order to better portray the relationship between certain debits and credits within the overall financial structure of an entity. A contra account can be used to remedy an error, to track depreciation of an asset, or to real estate bookkeeping register payments that are not collectible. Accrued assets are assets, such as interest receivable or accounts receivable, that have not been recorded by the end of an accounting period. Contra assets allow for more granular visibility on the balance sheet by maintaining historical costs and independent values rather than reducing the original account directly.