The expense account uses its debit balance to reduce the revenue account’s credit balance. 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.

• For example, after six years, the asset’s book value on the balance sheet will be $40,000.
• The contra revenue accounts commonly used in small-business accounting include sales returns, sales allowance and sale discounts.
• Bad debt expense is an expense that a business incurs once the repayment of credit previously extended to a customer is estimated to be uncollectible.
• The difference between an asset’s account balance and the contra account balance is known as the book value.

Contra asset accounts provide business owners with the true value of certain asset accounts. For example, let’s say your accounts receivable balance is currently $11,500, but you’re not entirely sure that you’ll be able to collect the entire balance due. https://www.globalvillagespace.com/GVS-US/main-features-of-bookkeeping-and-accounting-in-the-real-estate-industry/ For instance, the allowance for doubtful accounts reduces the net amount of accounts receivable, while the reserve for obsolete inventory does the same for inventory. Similarly, accrued liabilities reduce the total amount of current liabilities.

Contra Asset

An impairment cost must be included under expenses when the carrying value of a non-current asset on the balance sheet exceeds the asset’s market value subtracted by any transaction costs . The contra equity account reduces the total amount of shareholders’ equity. Learn why contra accounts, when utilized correctly along with a paired account, are a crucial component real estate bookkeeping of accurate accounting and financial review. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately.

Another example of a contra asset account is the accumulated depreciation account which reduces the reporting value of capital assets. Allowance for obsolete inventory or obsolete inventory reserve are also examples of contra asset accounts. Sales returns is a contra revenue account as the figure is a negative amount net against total sales revenue. It would appear on the company’s income statement in the revenue section.

The Struggles of Private Company Accounting

Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset. 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. Therefore, for these three, the debit balance actually represents a negative amount. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation.