What is a Contra Ascollection Account?
In accounting, a contra asset account is an asset account in which the natural balance of the account will either be a zero or a crmodify (negative) balance. The account offsets the balance in the corresponding ascollection account that it is paired with on the balance sheetBalance SheetThe balance sheet is just one of the three basic financial statements. The financial statements are key to both financial modeling and bookkeeping..
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Normal asset accounts have a delittle bit balance, while contra ascollection accounts are in a credit balance. Because of this, a contra asset can be regarded as an unfavorable asset account. Offestablishing the ascollection account with its corresponding contra ascollection account shows the net balance of that asset.
Examples of Contra Assets
Common examples of contra assets include:Reserve for obsolete inventory
Reasons to Sjust how Contra Accounts on the Balance Sheet
By reporting contra ascollection accounts on the balance sheetBalance SheetThe balance sheet is among the 3 standard financial statements. The financial statements are essential to both financial modeling and also audit., users of financial statements deserve to learn more about the assets of a firm. For example, if a firm just reported equipment at its net amount, users would not be able to observe the purchase price, the amount of depreciation attributed to that tools, and also the continuing to be valuable life. Contra asset accounts allow users to see exactly how a lot of an asset was written off, its staying beneficial life, and the worth of the asset.
Now let’s emphasis our attention on the 2 most common contra assets – collected depreciation and allowance for unconvinced accounts.
Contra Ascollection – Accumulated Depreciation
Accumulated depreciation is a contra asset account provided to document the amount of depreciation to date on a addressed ascollection. Examples of addressed assetsTypes of AssetsCommon forms of assets include current, non-present, physical, intangible, operating, and also non-operating. Correctly identifying and also include buildings, machinery, office devices, furniture, vehicles, and so on. The built up depreciation account shows up on the balance sheet and reduces the gross amount of addressed assets.Example of Accumulated Depreciation
Assume Company A purchases a maker for $300,000. The agency approximates that the machine’s beneficial life is three years through no salvage worth and also will use a straight-line depreciation methodStraight Line DepreciationStraight line depreciation is the a lot of commonly offered and also simplest method for allocating depreciation of an asset. With the straight line to the machine. The journal entries will look as follows:
On the balance sheet, accumulated depreciation would increase by yearly to reduce the value of the machine. Therefore:At the end of year 1, the net worth of the machine would be $300,000 – $100,000 in collected depreciation = $200,000.At the end of year 2, the net value of the machine would be $300,000 – $200,000 in built up depreciation = $100,000.At the end of year 3, the net worth of the machine would be $300,000 – $300,000 in collected depreciation = $0.
Allowance for Doubtful Accounts
Allowance for skeptical accounts (ADA) is a contra asset account supplied to create an allowance for customers that are not expected to pay the money owed for purchased goods or services. The allowance for cynical accounts appears on the balance sheet and reduces the amount of receivables.
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For example, Company A offers the portion of credit sales technique and approximates that 5% of credit sales will certainly default. The firm reported crmodify sales of $100,000. The journal entry would certainly look as follows:
On the balance sheet, allowance for doubtful accounts reduces the amount of receivables. For instance, if Company kind of A reported receivables of $100,000, the journal entry above would mitigate the amount of receivables by $5,000. $100,000 – $5,000 (allowance for unconvinced accounts) = $95,000 in net receivables.
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