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Advanced Financial Accounting
Virtual University
What Is a Contra Asset Account?
The balance of contra asset accounts affects financial results.
In double-entry accounting, each type of account--asset, liability, revenue, expense, and
owner's equity--has a normal balance of either debit or credit. Contra accounts are the
exception to this rule.
Assets normally carry a debit balance but can be reduced by related accounts known as contra
assets. Contra assets are used to reduce the value of other assets on the balance sheet
The contra asset account has a normal balance of credit. Accountants place it on the balance
sheet summary directly below the asset it reduces and directly above the net asset value.
Accountants use a contra asset account to track reductions to an asset separately from the
asset itself. The resulting benefit is that the balance sheet summary shows the original value
of the asset, the amount by which the asset has been reduced and the asset's net value.
Two common contra asset accounts are accumulated depreciation and allowance for doubtful
accounts. Accumulated depreciation reduces the net value of fixed assets as they are
expensed over their useful life, and the allowance for doubtful accounts offsets the value of
accounts receivable by an estimate of uncollectible sales.
Effect on Financial Statements
Understating a contra asset account understates the related expense on the income statement
and overstates the net value of the asset, total assets and owner’s equity on the balance sheet
summary. Overstating a contra asset has the opposite effect on those values.
(1)Revenue From Sales: In this section, usually called Gross Sales, revenue (income) earned
from normal operations is summarized. It is offset by the contra income accounts, Sales
Returns and Allowances and Sales Discounts.
Advanced Financial Accounting
Virtual University
Examples of the Contra Account Used with Assets and Liabilities
Contra accounts are separate accounts reported on the balance sheet that reduce or
increase the value of the main asset or liability account.
The account listed with the main asset account is called a contra asset account. Similarly, the
account listed with the main liability account is called a contra liability account. The contra
account is not an asset or liability in itself, but an account used to adjust the carrying amount
of the related asset or liability account.
The word contra means contrariwise; or on or to the contrary. Since asset accounts are debit
accounts, a contra asset account is a credit account used to offset the balance of the main
debit account.
Examples of Contra Accounts
Examples of contra asset accounts are accumulated depreciation, used to report fixed assets at
the book value (original cost – depreciation), and allowance for doubtful accounts, used to
report the accounts receivable asset with the adjustment for bad debt estimates. Allowance for
doubtful accounts is thus used to report accounts receivable at the net realizable value, or the
amount of cash the company expects to receive for the asset. The balance sheet for Sunny
Sunglasses Shop shows the following contra asset account reported with accounts receivable:
Contra Asset Account: Allowance for Doubtful Accounts
Accounts Receivable
Allowance for doubtful accounts (700)
Receivables, net
Examples of contra liability accounts are discounts to notes and bonds payable, and the shortterm portion of long-term debt. Since a note or bond payable is a liability and a credit
account, the contra liability account for the main account is a debit account used to offset the
balance of its related liability account. The balance sheet for Sunny Sunglasses Shop shows
the following contra liability account reported with the mortgage payable:
Contra Liability Account: Short-term portion of mortgage payable
Mortgage Payable
Short-term portion due
Mortgage Payable, long-term 17,100
In this case the $900 is a real short-term liability reported separately on the sample balance
sheet as a current portion of long-term debt coming due. The adjustment to long-term debt,
Advanced Financial Accounting
Virtual University
on the other hand, is a contra liability account to mortgage payable that reduces the mortgage
payable for long-term debt only.
Contra accounts are also called valuation allowances because they are used to adjust the
carrying value of the related asset or liability.
The Meaning of Contra Account (Valuation Allowance Account)
Not all accounts work additively with each other on the primary financial accounting
reports—especially on the income statement and balance sheet. There are many instances
where one account works to offset the impact of another account. The so-called contra
accounts "work against" other accounts in this way. In some situations, the contra accounts
reverse the debit and credit rules from the table above.
Contra-asset and contra-liability accounts are also called valuation allowance accounts,
because they work to adjust the book value, or carrying value for assets or liabilities, as
shown in the examples below.
The balance sheet example running throughout this encyclopedia has several contra account
examples, including these under "Assets:"
Grande Corporation
Figures in 1,000s
Balance Sheet at 31 December 2011
Current Assets
Accounts receivable............... 1,969
Less allowance doubtful accounts.. 137
Net accounts receivable............... 1,832
Property, Plant & Equipment
Factory mfr. equipment ........... 5,983
Less accumulated depreciation .. 2,782
Net factory mfr equipment. ........... 3,201
You may notice from the chart of accounts example below, that Accounts receivable
(Account 110 from the chart) and Allowance for doubtful accounts (Account 120) are both
asset accounts. Allowance for doubtful accounts, however, is a contra asset account that
reduces the impact (carrying value) contributed by Accounts receivable. The balance sheet
result is a "Net accounts receivable" less than the Accounts receivable value.
Advanced Financial Accounting
Virtual University
In the same way, Account 163, Factory Manufacturing equipment carries the value of
these assets at historical cost—what was actually paid for these assets. This will not decrease
as long as the company owns the assets. However, the asset's book value does change
downward from year to year, as shown on the balance sheet. Contra Account 175,
Accumulated depreciation, factory manufacturing equipment, is subtracted from the
Account 163 value, to produce the balance sheet result Net factory manufacturing equipment.
In each case above, incidentally there is also an expense category account involved, and those
appear on the income statement, not the balance sheet. In the first example, the expense
account is Bad debt expense and in the second case, the expense account is Depreciation
expense, factory machinery. The offsetting debit and credit transactions might look like this
way in the bookkeeper's journal (the chronological record of transactions)
Grande Corporation
Journal for Fiscal year 2011
DD-MMM-YY 630 Bad Debt Expense
DD-MMM-YY 120 Allowance for doubtful Accounts
DD-MMM-YY 770 Depreciation exp, factory
manufacturing equipment $2,782,000
DD-MMM-YY 175 Accumulated depreciation
expense, factory mfr equip
All four transactions add to the value of the accounts listed. Debiting each of the two expense
accounts adds to account value, as you would expect from the table in the previous section.
However notice here that crediting the two asset accounts adds to their value as well—just
the opposite of what the same table prescribes for asset accounts. For contra accounts in this
situation the rules are reversed, so that the fundamental equation Debits = Credits still holds
for every pair of transactions. The examples also show why a contra asset account is said to
hold a credit balance.
The above examples show contra-asset accounts, but there are also examples of contraliability accounts that operate in the same way. For example, on the liabilities side of the
balance sheet, a long term liability account Bonds payable may be accompanied by another
liability account, a contra liability account called Discounts on bonds payable. The value in
the contra account reduces the company's actual liability from the stated figure in the Bonds
payable account.
Contra liability accounts—like their contra asset account counterparts—also reverse the
debit/credit "rules" from the table in the previous section. An addition to a liability account is
normally a credit, but to a contra liability account, an addition is a debit. For this reason,
contra liability accounts are said to carry a debit balance.