contra asset account

(noun)

an account that corresponds to another is affected when a transaction is recorded

Related Terms

Examples of contra asset account in the following topics:

  • Goodwill Impairment

    • Goodwill is an intangible asset that is tested yearly for impairment; it is not amortized.
    • Year end calculations reveal the goodwill is valued at $8 million and an impairment loss of $1 million is recorded as a debit to Loss on Goodwill Impairment on the income statement and a credit to Accumulated Impairment Losses on the balance sheet (disclosed as a contra asset account to goodwill).
    • In accounting, goodwill is the value of an asset that is considered intangible but has a quantifiable "prudent value" in a business.
    • Goodwill's value on the balance sheet is reported at net of accumulated impairment loss, a contra asset account; the current impairment loss is reported on the income statement.
    • 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 (recoverable amount).

  • Valuing Notes Receivable

    • Companies have two methods available to them for measuring the net value of accounts receivable: the allowance method and the direct write-off method.
    • Notes receivable are considered current assets if they are to be paid within 1 year and non-current if they are expected to be paid after one year.
    • Accrued revenue (or accrued assets) is an asset such as proceeds from a delivery of goods or services, at which such income item is earned and the related revenue item is recognized, while cash for them is to be received in a latter accounting period.
    • The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
    • The entry would consist of debiting a bad debt expense account and crediting the respective accounts receivable in the sales ledger.

  • Cost of Equipment

    • Fixed assets, also known as non-current or tangible assets, include property, plant, and equipment.
    • Fixed assets, according to International Accounting Standard (IAS) 16, are long range assets whose cost can be measured reliably.
    • Depreciation is a periodic reduction in an asset's value.
    • It is disclosed on the income statement and appears as a contra-asset account on the balance sheet.
    • Since accounting standards state that an asset should be carried at the net book value, equipment is listed on the balance sheet at its historical cost amount.

  • Recognizing Notes Receivable

    • In accounting, notes receivables are accounts to keep track of accrued assets that have been earned but not yet received.
    • In accounting, notes receivables are accounts to keep track of accrued assets that have been earned but not yet received.
    • Accrued assets are assets, such as interest receivable or accounts receivable, that have not been recorded by the end of an accounting period.
    • These assets represent rights to receive future payments that are not due at the balance sheet date.
    • The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.

  • Limited-Life Impairment

    • Year end calculations reveal the patent is valued at $8 million and an impairment loss of $2 million is recorded as a debit to Loss on Patent Impairment on the income statement and a credit to Accumulated Impairment Losses on the balance sheet (disclosed as a contra asset account to the intangible asset).
    • Intangible assets are non-monetary assets that cannot be seen, touched, or physically measured.
    • Intangible assets are created through time and effort, and are identifiable as separate assets.
    • That calculated amount is credited to either the appropriate intangible asset account or accumulated amortization account .
    • Increases in value in excess of prior impairment loss are debited directly to the asset and credited to a revaluation reserve account in the equity section of the balance sheet.

  • Indefinite-Life Impairment

    • Year end calculations reveal the trademark is valued at $8 million and an impairment loss of $2 million is recorded as a debit to Loss on Trademark Impairment on the income statement and a credit to Accumulated Impairment Losses on the balance sheet (disclosed as a contra asset account to the intangible asset).
    • In accounting, intangible assets are defined as non-monetary assets that cannot be seen, touched or physically measured.
    • Since intangible assets are typically expensed according to their respective life expectancy, it is important to understand the difference between limited-life intangible assets and indefinite-life intangible assets.
    • Instead of amortization, indefinite-life assets are evaluated for impairment yearly.
    • Increases in value in excess of prior impairment loss is debited directly to the asset and credited to a revaluation reserve account in the equity section of the balance sheet.

  • Basic types of accounts

    • Asset accounts: represent the different types of economic resources owned by a business, common examples of asset accounts are cash, cash in bank, equipment, building, inventory, prepaid rent, goodwill, accounts receivable.Assets are usually broken down into three categories: Current assets, fixed assets, and intangible assets.
    • Current assets are assets which could be converted to cash fairly quickly if necessary, certainly in less than a year.Examples of current assets include cash, cash in bank, inventory, prepaid rent, and accounts receivable.Fixed assets are assets of a more permanent nature like manufacturing equipment, buildings owned, and the like.Intangible assets, like goodwill, are monetary values assigned to intangibles like a brand name.It is typically used when accountants need to justify the purchase price of one company by another when the price cannot be justified by the monetary value of the purchased company's assets minus liabilities.Intangible assets are beyond the scope of this chapter as they apply more to larger corporations than to a start-up business.
    • Contra-accounts: from the term ciccia, meaning to deduct, these accounts are opposite to the other five above mentioned types of accounts.For instance, a contra-asset account is accumulated depreciation.This label represents deductions to a relatively permanent asset like a building.It accumulates an annual charge in recognition that a fixed asset like a building is not used up over the course of a year, but that it has a useful life measured in multiple years.Since in certain countries and under certain economic conditions real estate tends to steadily rise in price, perhaps a better example is a truck purchased for use in the business.Its value is more likely to continue to decrease over the years.Even though the market value of a building might increase rather than decrease over the years, accountants will still reduce its value by an annual depreciation charge each year.This is a good example of how financial accounting differs from managerial accounting from the owner's perspective.Depreciation on a building or a truck reduces income for tax purposes in most countries, so it is to the owner's advantage to reflect depreciation charges in the company's accounting records.On the other hand, you can bet that the owner knows the true market value of the building when it comes time to sell it!
    • Setting up an appropriate chart of accounts will take some careful thought on your part because you want to be sure that accounts are set up in each category (i.e. assets liabilities, etc. ) that will enable you to accumulate accounting transactions in a meaningful way.
    • For example, starting with the asset account category, you may decide that you need to begin your business with at least the following accounts:

  • Sale

    • Unlike a regular disposal of an asset, where the asset is abandoned and written off the accounting records, an asset disposal sale involves a receipt of cash or other proceeds.
    • The increase in the accumulated depreciation account reduces the asset to its current book value .
    • The proceeds from the sale will increase (debit) cash or other asset account.
    • The entry to remove the asset and its contra account off the balance sheet involves decreasing (crediting) the asset's account by its cost and decreasing (crediting) the accumulated depreciation account by its account balance.
    • Prior to zeroing out their account balances, these accounts should reflect the updated depreciation expense computed up to the disposal sale date.

  • Resource Cost Write-Off

    • In accounting terminology, it refers to recognition of the reduced or zero value of an asset no longer in use.
    • The journal entry will credit (decrease) the asset's account balance (equal to its historical cost) and debit (decrease) the balance in the accumulated depletion account.
    • The decrease in the asset and accumulated depletion accounts reduces the balance to zero and removes the account from the balance sheet.
    • A write-off journal entry removes an asset not in use and its related contra account (accumulated depletion) from the balance sheet.
    • The asset's balance is reduced by the impairment amount to reflect the asset's new economic value and the account remains on the balance sheet.

  • Recording Transactions

    • You purchase $500 worth of mats and other equipment for use during classes.Cash -500, PPE 500; Assets(+), Assets(-)=03.
    • An account is the part of the accounting system used to classify and summarize the increases, decreases, and balances of each asset, liability, stockholders' equity item, dividend, revenue, and expense.
    • All accounts have corresponding contra accounts depending on what transaction has taken place; i.e., when a vehicle is purchased using cash, the asset account "Vehicles" is debited as the vehicle account increases, and simultaneously the asset account "Bank" is credited due to the payment of the vehicle using cash.
    • Some balance sheet items have corresponding contra accounts, with negative balances, that offset them.
    • If one account (or accounts) is debited for $100, then another account (or accounts) must be credited for the same amount.