The amount is reported on the balance sheet in the asset section immediately below accounts receivable. The net of these two figures is typically reported on a third line. It is clear evident in the chart above that contra account is following the rule of going in reverse. Either it is asset, liability, or equity what the account do is to have an opposite balance. Contra accounts are displayed on the same financial statement as the account they are related to.
- It is shown as a part of the owner’s equity in the liability side of the company’s balance sheet.
- A contra asset account is an account that opposes the balances of other asset accounts.
- This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms.
The accounting entries for accumulated depreciation are as follows. Liabilities AccountsLiability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company. A contra account is an account used in a general ledger to reduce the value of a related account. When the interest is paid you could debit interest payable and credit cash. For better understanding, let me take 2 examples from above – Accumulated Amortization & Reserve/Provision for Doubtful Debts, & demonstrate the presence of the same in the extract of the balance sheet. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent.
How to Record a Contra Account
A liability 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. A contra asset account is a type of asset account where the account balance may either be a negative or zero balance.
- 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.
- Discount on bonds payable is a result of a bond issued for less than the face value of the bond.
- Contra accounts are used to reduce the original account directly, keeping financial accounting records clean.
- Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available.
For instance, the balance of the equity account is $10,000, and the owner of the business withdraws $900 for personal use. Likewise, drawing contra asset means to withdraw money from the business for personal use. There are many situations where one account is used to offset another account.
How to Account for Issuance of Par Value Shares
In footnote 3, the company reports, „Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021.“ Contra LiabilityFinancing fees in M&A are an example of a contra liability, as the fees are amortized over the debt’s maturity – which in turn reduces the tax burden until the end of the term.
DateParticularsDr.Cr.Depreciation$10,000Accumulated Depreciation$10,000In the above example, depreciation is an expense account. On the other hand, accumulated depreciation is a https://www.bookstime.com/ account. Regardless of that, allowance for receivables accounts will exist for all companies that have account receivable balances. This account helps companies present a more accurate accounts receivable balance on the financial statements.
Presentation of Contra Assets
Contra assets are used to reduce the value of an asset, such as accounts receivable or inventory, that will eventually be sold or otherwise converted into cash. Most companies have contra assets on their balance sheets, though the specific items included will vary from company to company. Taking into account the list of contra asset accounts, how would you calculate the net value of assets? If the example looks difficult, rest assured the solution is very simple. 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.
Companies bury them in the footnotes and often don’t break out the actual calculation. Still, it is important when possible to consider how the net accounts are calculated and be wary of companies that are reporting a ton of bad debts. Home Depot reports net receivables and net property and equipment, implying that both are reduced by contra assets. We’ll need to dig into the footnotes to find out what the contra accounts are.
How Contra Asset Accounts Work
In either case, using these accounts can help you better manage depreciation expense, keep your accounts receivable balance accurate, and properly dispose of and account for obsolete inventory. Contra asset accounts provide business owners with the true value of certain asset accounts. For example, let’s say your accounts receivable balance is currently $11,500, but you’re not entirely sure that you’ll be able to collect the entire balance due. Likewise, when you pay a bill, your cash account is reduced because you’re lowering the balance.