Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset. Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, contra asset account etc. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. In order to balance the journal entry, a debit will be made to the bad debt expense for $4,000.

• Contra asset accounts are recorded with a credit balance that decreases the balance of an asset.
• A company might decide to purchase its stock when the board of directors feel the stock is undervalued or when it wishes to pay its shareholders dividends.
• The accumulated depreciation amount shows how much depreciation expense has been charged against an asset.
• Another example of a contra asset account is the accumulated depreciation account which reduces the reporting value of capital assets.
• If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000.
• However, if the billing office stopped there, you would overstate your assets and net income.
• The credit balance in the account Allowance for Doubtful Accounts tells us how much of the debit balance in Accounts Receivable is unlikely to be collected.

The balance sheet impact includes the remaining account receivable after returns and the estimated uncollectible. Contra revenue accounts show the reduced gross income because certain asset expenses give a business a net revenue outlook. Conta revenue account examples include https://www.bookstime.com/ sales returns, sales allowance, and discounts. 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.

Definition of Contra Asset Account

If we record those events within the relating account, we risk losing information that is relevant to analyzing performance. While tracking contra asset accounts is cumbersome for bookkeepers and accounting clerks using manual accounting systems, if you’re using accounting software you’ll find that most of the heavy lifting is done for you. You may not need to use contra asset accounts right now, but as your business grows, using contra asset accounts will likely become a necessity. The accumulated depreciation account is perhaps the most common contra asset account used by business owners. Contra asset accounts provide business owners with the true value of certain asset accounts.

Although they all aim at reducing the balance of some type of account, it is useful to have some general foundational knowledge of the different types of accounts. Contra asset accounts are necessary for companies for various reasons. The most prominent of these include allowing companies to present a more accurate picture of their assets.

Contra equity accounts

Contra revenue accounts show the deducting adjustments to gross revenue or producing net revenue. Sales returned for a refund are posted to the contra account to reduce gross revenue or return on sales. The other side of the transaction is posted to cash because there is no value in retaining the sales transaction in the cash account. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation.