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Note that in accounting, the term “book value” is also used interchangeably with net value. Therefore, the book value of an asset in the books is equal to its historical cost (the debit balance of the asset) minus the related amount of contra asset in the balance sheet (the credit balance of the contra asset). The contra asset account of your equipment account is the accumulated depreciation of equipment. When the balance in the accumulated depreciation is $10,000 and your equipment account has a debit balance of $50,000, then the book value of your equipment is $40,000. The two most common contra accounts on a balance are accumulated depreciation and the allowance for doubtful debts. Accumulated depreciation tallies the depreciation to date of a fixed asset, such as a car or a building.
A liability account would usually contain credit balance however at times to offset a liability a separate account is used which contains debit balance and is paired along with it, this account is called a contra liability account. Seldom used in practice a contra liability account is used for book value adjustments related to an asset or a liability. The following are examples of commonly-used contra asset accounts you could create to better understand your business financials. However, it’s important to keep in mind that you can create any contra account you want to more clearly describe your business — this is not an exhaustive or definitive list. By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount.
It can be used to keep the historical value in one account while presenting a decrease or write-down in another that nets the current book value. When the original dollar amount is kept in the original account and a separate account is used for recording the deduction, the resulting financial information becomes more transparent and helpful for stakeholders. 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. Get instant access to video lessons taught by experienced investment bankers.
Contra accounts help provide more accurate financial information by separating certain items and highlighting their impact on the overall financial position. Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock. The main reason is to make the remaining shares more valuable, as their prices are expected to rise after the stock buyback. The OID is calculated as the difference between the redemption price and the discounted issuance price. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. Wanting to spruce up its aging inventory, Show-Fleur purchased new, climate controlled-seats for its fleet, delivering increased comfort for passengers and a cleaner, more modern look for vehicle interiors.
In terms of the journal entries, the debit balance in “Discount on Bonds Payable” is subtracted from the credit balance in the “Bonds Payable”. The first contra liability listed is an original issue discount (OID), a feature of debt financing wherein the issuance price is less than the redemption price. 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). A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. The purpose of the Accumulated Depreciation account is to track the reduction in the value of the asset while preserving the historical cost of the asset.
However, some items may also reduce the total reported amount on these accounts. Allowance for doubtful accounts primarily refers to making an allowance for the estimated portion of accounts that may be uncollectible and thus become bad debt. It is shown as a contra asset account on the balance sheet, which reduces the gross receivables to represent the net amount that has to be paid. To oppose the revenue made by a company, contra revenue accounts must have a debit balance. 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.
Contra liability accounts have a debit balance, which is the opposite of the typical credit balance found in liability accounts. The purpose of a contra liability account is to reduce the total liability shown on the balance sheet by reflecting specific adjustments, allowances, or discounts related to the liability. Similarly, its underlying balances also appear on the credit side of the trial balance. However, a contra equity account is a debit balance that reduces the balances reported on equity accounts.
One such method is the use of contra accounts, a type of account that directly correlates and offsets a related account. Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets. In case the contra asset account is not listed in the balance sheet, it must be listed in the footnotes of the financial statement for the users to be informed. The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable. It also shows the carrying (net) amount of $19,000, which you report to your firm’s balance sheet.
This means that the $85,000 balance is overstated compared to its real value. At this point, it isn’t known which accounts will become uncollectible so the Accounts Receivable balance isn’t adjusted. Instead, an adjusting journal entry is done to record the estimated amount of bad debt. Because they’re designed to track changes in certain assets or liabilities, they can be used to document transactions more accurately.
Contra equity accounts carry a debit balance and reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance. You may want to first classify contra accounts as contra asset accounts, contra liability accounts, contra equity accounts, or contra revenue accounts before accounting for any transaction. Or, if the contra liability account balance is immaterial, the accounting staff could elect not to keep a balance in the account at all.
A liability account typically has a credit balance, which means that an increase in the account is recorded as a credit and a decrease is recorded as a debit. A contra-liability account, on the other hand, has a debit balance, which means that an increase in the account is recorded as a debit and a decrease is recorded as a credit. To find out the current actual value of bonds payable the accountant would have to reduce the debit balance inside the contra liability account from credit balance of the particular liability account. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns.
And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Master accounting topics that pose a particular challenge to finance professionals. A company receives rebates for advertising it does on behalf of brands it carries in its stores.
Emilie is a Certified Accountant and Banker with Master’s in Business and 15 years of experience in finance and accounting from corporates, financial services firms – and fast growing start-ups. The most common contra type, contra assets, records the loss in value of any asset accounts listed in your general ledger. And by comparing these contras against their corresponding parent accounts, you can better understand adjusted cash book the actual value of the assets retained by your business. Because contra asset accounts are used so frequently, it’s worth spending a little bit more time on them here, including common subtypes. 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.
