The reason that a ledger account is often referred to as a T-account is due to the way the account is physically drawn on paper (representing a “T”). The left column is for debit entries, while the right column is for credit entries. DrCrEquipment500ABC Computers 500The journal entry “ABC Computers” is indented to indicate that this is the credit transaction. It is accepted accounting practice to indent credit transactions recorded within a journal.

This is because most people typically only see their personal bank accounts and billing statements (e.g., from a utility). A depositor’s bank account is actually a Liability to the bank, because the bank legally owes the money to the depositor. Thus, contra asset account definition when the customer makes a deposit, the bank credits the account (increases the bank’s liability). At the same time, the bank adds the money to its own cash holdings account. But the customer typically does not see this side of the transaction.

Requirements of contra asset accounts:

In finance, a contra account reduces the value of related or corresponding account. It offsets the balance of the related account, which means when the corresponding account is positive, a contra account will be negative. Accumulated amortization is an account similar to accumulated depreciation. This account only relates to a company’s intangible assets rather than tangible. Credit BalanceCredit Balance is the capital amount that a company owes to its customers & it is reflected on the right side of the General Ledger Account. Usually, Liability accounts, Revenue accounts, Equity Accounts, Contra-Expense & Contra-Asset accounts tend to have the credit balance. Outstanding SharesOutstanding shares are the stocks available with the company’s shareholders at a given point of time after excluding the shares that the entity had repurchased.

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 general ledger is a record-keeping system for a company’s financial data, with debit and credit account records validated by a trial balance. Now let’s focus our attention on the two most common contra assets – accumulated depreciation and allowance for doubtful accounts.

Types of Contra Assets

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. This results in compliance with the accrual concept while reflecting on an accurate accounts receivable balance. The information featured in this article is based on our best estimates of pricing, package details, contract stipulations, and service available at the time of writing.

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 https://online-accounting.net/ allowance account. 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.

What Is A Contra Account? Definition

Despite the use of a minus sign, debits and credits do not correspond directly to positive and negative numbers. Debit balances are normal for asset and expense accounts, and credit balances are normal for liability, equity and revenue accounts.

If a ledger were to be observed in this situation, then one would see a balance of three asset debits matched up against three contra asset credits . When examining the term “contra asset account,” look no further than the root of contra to get a vague grasp of the definition.

Contra liability account

Revenue AccountRevenue accounts are those that report the business’s income and thus have credit balances. Revenue from sales, revenue from rental income, revenue from interest income, are it’s common examples.

• As mentioned above, these accounts also pair with a paired account and reduce its carrying balance.
• Reserve for obsolete inventory is a contra asset account that is used to reduce the net value of a company’s balance sheet.
• A contra account is an account with a balance opposite the normal accounts in its category.
• DepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life.
• An organization would rather record $100,000 as an asset and would amortize $10,000 depreciation each year for the next 10 years.
• The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables.

Most companies rely heavily on the profit and loss report and review it regularly to enable strategic decision making. Accumulated depreciation accounts accumulate the depreciation expense provided so far about the corresponding asset. It is shown as a reduction to the asset account and is reversed when the asset is disposed of. The discount offered on the liability created when a company borrows a specific amount of money and repays it early. Discount on notes payable reduces the total amount of the note to reflect the discount offered by the lender. These accounts can be listed based on the respective asset, liability, or equity account to reduce their original balance. The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet.

Treasure stock is a good example as it carries a debit balance and decreases the overall stockholders’ equity. A contra account is an account with a balance opposite the normal accounts in its category. Contra accounts are usually linked to specific accounts on thebalance sheetand are reported as subtractions from these accounts. In other words, contra accounts are used to reduce normal accounts on the balance sheet.

Contra accounts relate to all areas in the balance sheet, including assets, liabilities, and equity. These accounts are crucial in the financial reporting process, as stated above. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. A contra asset account is an account that opposes the balances of other asset accounts. As mentioned, a company will usually have debit balances in its asset accounts.

Contra asset accounts aren’t the only way that asset accounts can carry a credit balance. A treasury stock is an example of a contra equity account that reduces the amount of total equity. Where a liability’s normal balance is a credit, a liability contra account is debited in order to reduce the amount of the liability.