What is a Contra Account?
A general ledger account, along with a balance that differs from the typical compensation for that account classification is referred to as a contra account. By using a contra account, a business can record both the initial amount and a decrease to disclose the net amount as well. The term "net amount" is frequently used interchangeably with "carrying amount" or "net realizable amount."
Find out why using contra accounts properly, coupled with a matched account, is essential for accurate accounting and financial analysis.
HOW CONTRA ASSET ACCOUNTS WORK
In double-entry accounting, contra-asset accounts are practical instruments. Additionally, they assist in maintaining the books' accuracy and leave a clean financial trail for later analysis and reporting.
For instance, when it comes to fixed assets, it is typical to preserve the purchase price of a piece of equipment as a historical cost in the debit asset account.
The cumulative depreciation contra-asset account, which is a credit account, is where most accountants decide to record an item's depreciation during its useful life.
The equipment would be included on the balance sheet at its historical cost, with the cumulative depreciation being subtracted to represent the asset's true worth.
Types used in Contra Assets
Although the most typical counter asset account is cumulative depreciation, the following may also be applicable depending on the business.
Allowance for Doubtful Accounts
Because it lowers the value of the accounts receivable (AR) account on the general ledger, the allowance for suspicious accounts is a counter asset. When a business offers things on credit, management frequently assumes some consumers won't pay and plans to write off bad debt.
Obsolete Inventory
The outdated inventory reserve, which lowers the total inventory value on the balance sheet, is far less typical. A reserve equivalent to the allowance for doubtful accounts is held in this counter account. There will be a matching credit against the outdated inventory contra account for each debit against the inventory account.
Accumulated Depreciation
The amount of depreciation on a fixed asset up to that point is recorded in the contra-asset account, known as accumulated depreciation. Examples of fixed assets include structures, equipment, furniture, cars, and office supplies. The balance sheet's cumulative depreciation account shows and lowers the total fixed assets.
FINAL INSIGHT
In double-entry accounting, a contra asset is a negative account used to lower the balance of a matched asset account in the general ledger.
A contra account always offsets the balance of a related account. Therefore, any contra account item is shown on a company's balance sheet under the matched tab.
Users of the financial statement can obtain comprehensive information from the contra accounts in the balance sheet. However, users might be unable to perceive how each element has performed over time if the numbers are provided at net value.
By utilizing the idea of a contra account, it is possible to quickly and easily determine the history of specific debits and credits in the books of a particular organization and how they connect by merely looking at the accounting records of that company.
