What is a Contra Asset Account?

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. Your bank account, the inventory you currently stock, the equipment you purchase, and your accounts receivable balance are all considered asset accounts. The account Allowance for Doubtful Account is credited when the account Bad Debts Expense is debited under the allowance method.

• The natural balance in a contra asset account is a credit balance, as opposed to the natural debit balance in all other asset accounts.
• The accumulated depreciation account is perhaps the most common contra asset account used by business owners.
• Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.
• On the balance sheet, the net accounts receivable will be reported as $57,600 ($60,000 – $2,400).
• For example, a building is acquired for $20,000, that $20,000 is recorded on the general ledger while the depreciation of the building is recorded separately.

Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee. You can estimate the total to record in the allowance for doubtful accounts based on uncollectible revenue totals from the previous year or you can conservatively estimate the amount. 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).

Example of a Contra Asset Account

To offset this, the allowance for doubtful accounts balance is adjusted via a credit, while the bad debt account is debited to balance out the AR account. When combined, the AR account and the allowance for doubtful accounts contra assets offer a projection of how much net cash is expected to be received from outstanding accounts. Reserve https://www.bookstime.com/ for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete. Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods. In this scenario, a write-down is recorded to the reserve for obsolete inventory.

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. If a ledger were to be observed in this situation, then one would see a balance of three asset debits (van, building, equipment) matched up against three contra asset credits (van, building, equipment).

Definition of Contra Asset Account

Contra liabilities reduce liability accounts and carry a debit balance. Contra revenue accounts reduce revenue accounts and have a debit balance. A business might elect to separately state contra asset accounts on its balance sheet, so that the users of its financial statements can obtain additional https://www.bookstime.com/articles/contra-asset-account information about the contents of these accounts. A contra asset account is a type of account in financial accounting used to offset the balance of a corresponding asset account. Contra asset accounts have a credit balance, which is the opposite of the typical debit balance found in asset accounts.