Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset's net value or book value. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete. Excess, stored inventory will near the end of waive vs wave its lifespan at some point and, in turn, result in expired or unsellable goods. In this scenario, a write-down is recorded to the reserve for obsolete inventory. To offset this, the allowance for doubtful accounts balance is adjusted via a credit, while the bad debt account is debited to balance out the AR account.
- Or possibly the investor is a contrarian, meaning they prefer to buy or sell assets that go against the flow of the broader market or economy.
- For example, a bond with a principal amount of $1,000 may be sold for only $950.
- The $10,000 of depreciation will reduce the book value of the car.
- However, the European version, titled Gryzor, only allows two players to play the game alternating rather than simultaneously.
- By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes.
For each debit against the inventory account, there will be a corresponding credit against the obsolete inventory contra account. 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. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming. The natural balance of a contra asset account, in this case, is exactly the opposite of the balance of the related account.
Types of Contra Accounts
The contra proferentem rule guides the legal interpretation of contracts and is typically applied when a contract is challenged in court. Whether reported as separate lines on the financial report or as a cumulative value, the net amount of the pair of accounts is called the “net book value” of the individual asset. At times the correlation is negative, other times it is positive, and tends to oscillate back and forth. Many investors like to hold gold as it is viewed as an outperformer during tough times for the stock market. A contra market stock or sector is one that performs well in bear markets and underperforms in bull markets.
If the asset account had a credit balance or the contra asset account had a debit balance, this would indicate an error in the journal entries. Note that in accounting, the term “book value” is also used interchangeably with net value. Setting up contra asset accounts is easy with accounting software. A bit more work will be required on the accountant’s or account analyst’s behalf if books are done manually without any software. Hopefully, you have a pretty clear idea of contra asset meaning—no need to ask to define contra asset accounts anymore. Including contra asset accounts on your balance sheets can be hugely beneficial for your business.
There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra liabilities reduce liability accounts and carry a debit balance.
The allowance for doubtful accounts is a contra asset because it reduces the value of the accounts receivable (AR) account on the general ledger. Often when a company extends goods on credit, management expects some of those customers not to pay and so anticipates writing off bad debt. A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger. Another question that we get is what is the relationship between a contra asset balance and the book value. Investopedia notes that the difference between the asset’s contra account balance and its account balance is called the book value.
Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values. Stocks and gold both sank in 2008, but gold turned higher earlier than stocks and ran to the upside into the 2011 high. One advantage of contra markets is that they tend to be out of favor when the broader market is doing well, which may provide some opportunities for value investors to snatch up some deals. The allowance for these doubtful accounts can ultimately result in the total number of receivables. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.
Disadvantages of Investing in Contra Markets
It is a ruling that can change a contract’s interpretation or results after both parties have mutually agreed on the contract. Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest.
A contra asset account is an account in the balance sheet that offsets the balance of a regular asset account. Far less common is the obsolete inventory reserve, which reduces the overall inventory value on the balance sheet. This contra account holds a reserve, similar to the allowance for doubtful accounts.
Contra Account
When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. These contra revenue accounts tend to have a debit balance and are used to calculate net sales. Even small businesses benefit immensely from contra asset accounts.
What Is a Contra Market?
When one player loses all of their lives, they are given the option to use the other player's stock to keep fighting. The arcade game was a commercial success worldwide, becoming one of the top four highest-grossing dedicated arcade games of 1987 in the United States. The NES version was also a critical and commercial success, with Electronic Gaming Monthly awarding it for being the Best Action Game of 1988. GAAP, the allowance for doubtful accounts represents management’s estimate of the percentage of “uncollectible” accounts receivable (i.e. the credit purchases from customers that are not expected to be paid).
Contra (video game)
The account Allowance for Doubtful Account is credited when the account Bad Debts Expense is debited under the allowance method. The use of Allowance for Doubtful Accounts allows us to see in Accounts Receivable the total amount that the company has a right to collect from its credit customers. 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 most common contra equity account is called “treasury stock.” This special account decreases the number of shares outstanding in the market because the company repurchases some of the shares from its buyers. Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks. Whenever the balance of a contra asset account increases (credit to the contra asset account), the increased amount is written off as an expense and is reported in the company's income statement.
The Contra Revenue Account
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. Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset. This account appears next to the current asset Accounts Receivable.
Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances. However, some asset accounts need a negative counterpart to reduce the balance of that account. The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Therefore, a contra asset can be regarded as a negative asset account. Offsetting the asset account with its respective contra asset account shows the net balance of that asset.
Taken together, the asset account and contra asset account reveal the net amount of fixed assets still remaining. A contra asset account is not classified as an asset, since it does not represent long-term value, nor is it classified as a liability, since it does not represent a future obligation. A contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as contra asset accounts.
Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts. In other words, contra accounts are used to reduce normal accounts on the balance sheet. Contra liabilities are common in companies that sell bonds to raise capital. To drum up interest in the bond, the company will sell it at a discount. For example, a bond with a principal amount of $1,000 may be sold for only $950. The bond is listed on the balance sheet at the full amount of $1,000, but the cash received is just $950, so a contra liability for the discount is listed to make the entry balance.
The level designs themselves are drastically different from the arcade version too. The two base stages for example (Stage 2 and 4), no longer have their mazelike structures nor is there any time limit involved. The boss of the waterfall stage was also changed from a diamond-shaped sensor to an alien statue.
