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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. Contra asset accounts are, as the name implies, accounts that are contrary to popular belief. Contra asset accounts have a credit balance as compared to a debit balance that most other types of accounts have. Before we start talking about the finer details, it’s important to know what is a contra asset account.

The pulls the value of the combined accounts down, which in turn decreases the value of the second account as well, which is a normal account. While accumulated depreciation is the most common contra asset account, the following also may apply, depending on the company. Contra liability accounts are special accounts in the liabilities section of the balance sheet.

What is a Contra Asset Account?

You’ll continue to use the contra asset account until the equipment has been completely depreciated, retired, or sold. 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 an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity).

contra asset account

Ultimately, an accumulated depreciation contra asset account helps the company reduce the gross amount of all the fixed assets within a company. The most common contra account is the accumulated depreciation account, which offsets the fixed asset account. Taken together, the asset account and contra asset account reveal the net amount of fixed assets still remaining.

Contra asset accounts journal entries

Note that the contra liability account has a positive balance (a debit balance), and the liability account normally has a credit balance. Hence, the book value of the liability will be the credit balance of the liability account minus the debit balance of its contra liability counterpart. Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets. In case the Whai is Law Firm Accounting: Best practice is not listed in the balance sheet, it must be listed in the footnotes of the financial statement for the users to be informed.

A bit more work will be required on the accountant’s or account analyst’s behalf if books are done manually without any software. Hopefully, you have a pretty clear idea of contra asset meaning—no need to ask to define Bookkeeping for A Law Firm: Best Practices, FAQs Shoeboxeds anymore. Including contra asset accounts on your balance sheets can be hugely beneficial for your business. Contra asset accounts are asset accounts where the balance is a credit balance. They are called “contra” asset accounts because these accounts are contrary to normal accounts.

An example of recording a contra asset

Since it is a contra asset account, this allowance account must have a credit balance (which is contrary to the debit balances found in asset accounts). The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable. Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000. Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances.

contra asset account

Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value. Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance.