Contra asset is an account that when increased, decreases the value of a related asset on the books a True b False

Osman started his career as an investment banking analyst at Thomas Weisel Partners… This content was originally created by member WallStreetOasis.com and has evolved with the help of our mentors. This first criterion means that the car will have a net value or book value of $0 once it is fully depreciated. Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock.

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. Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement. The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline. Contra asset accounts also help companies keep their general ledgers organized.

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They aim to reduce the balance of some related liability accounts. This would let users of the financial statements calculate the book value of the liability. The contra asset account, accumulated depreciation, is always a credit balance. 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 also provide a clear picture of the companies’ accumulation of assets.

This depreciation is saved in a How Much Do Bookkeeping Services for Small Businesses Cost? account called accumulated depreciation. The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment. The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. Expense accounts are technically contra equity accounts because they are linked to another equity account, revenue, and maintain an opposite balance. The expense account uses its debit balance to reduce the revenue account’s credit balance. Treasury stock and drawing accounts are examples of contra equity accounts.

Types of Contra Assets

For instance, it is common to keep the purchase price of a piece of equipment as a historical cost in the debit asset account when it comes to fixed assets. Key examples of https://accounting-services.net/bookkeeping-pricing-packages-plans/ accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts reduce accounts receivable, while accumulated deprecation is used to reduce the value of a fixed asset.

The net of the asset and its related contra asset account is referred to as the asset’s book value or carrying value. A contra account is used in order to better portray the relationship between certain debits and credits within the overall financial structure of an entity. A contra account can be used to remedy an error, to track depreciation of an asset, or to register payments that are not collectible. Contra accounts are used to help a company report the original amount of a transaction as well as reductions that may have happened. They serve an invaluable function in financial reporting that enhances transparency in accounting books.