Contra accounts are displayed on the same financial statement as the account they are related to. This is usually done by putting the contra account directly below the main account on the statement, with a third line for the net amount.

Under MACRS, the IRS assigns a useful life to different types of assets. For example, office furniture is depreciated over seven years, automobiles get depreciated over five years, and commercial real estate is depreciated over 39 years. Accumulated depreciation is not a current asset, as current assets aren’t depreciated because they aren’t expected to last longer than one year. A current asset is any asset a company owns that will provide value for or within one year. Current assets are often used to pay for day-to-day-expenses and current liabilities (short-term liabilities that must be paid within one year).

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As usual, for these funds to be a current asset, they must be expected to be received within a year. If a company elects to pay for, say, three years of rent in advance, then the remaining 24 months of rent are not counted as a current asset. Land does not have accumulated depreciation, because land account is not depreciated. Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers.

Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. The most common contra account is the accumulated depreciation account, which offsets the fixed asset account. 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. Contra assets and contra liabilities are listed on a company’s balance sheet and carry balances opposite of their related accounts.

What Are the Different Types of Contra Accounts?

They will need to determine what accountants call its useful life, which is how long the asset will last. Within equity, an example of a contra account https://online-accounting.net/ is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock.

• Depreciation is listed as a contra account on a company’s balance sheet.
• He also thinks the truck will be worth about $5,000 after all that use.
• At the end of the first year, the net value of the equipment would be $300,000 – $50,000 in accumulated depreciation, so the net value of the equipment at the end of the first year would amount to $250,000.
• This type of asset account is referred to as “contra” because normal asset accounts might include a debit, or positive, balance, and contra asset accounts can include a credit, or negative, balance.
• All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables. Allowance for doubtful accounts is an estimate of the amount of an asset, such as accounts receivable, that will not be collected. The contra asset account is used to reduce the value of the asset on the balance sheet. Some companies don’t list accumulated depreciation separately on the balance sheet. Instead, the balance sheet might is depreciation a contra asset say “Property, plant, and equipment – net,” and show the book value of the company’s assets, net of accumulated depreciation. In this case, you may be able to find more details about the book value of the company’s assets and accumulated depreciation in the financial statement disclosures. An accumulated depreciation account is an example of a contra- asset account, which shows how much depreciation has been deducted against an asset.

What Other Types of Contra Accounts Are Recorded on the Balance Sheet?

If you depreciated it evenly you would take $20,000, divide it by 5 and expense $4,000 each year. On the balance sheet you would list the asset at $20,000 then show the $4,000 in accumulated depreciation being subtracted from it for a net value of $16,000. Accumulated depreciation is a contra account because it subtracts from the asset. Allowance for doubtful accounts is a contra account because it subtracts from the asset accounts receivable.

Nova Incorporated is attempting to finalize their balance sheet in terms of the net value of their assets. At the end of the year, their assets are as follows… Nova Company valued a van at $30,000, an office building at $500,000 and office equipment at $20,000. At the same time, depreciation for the van at the end of the year ended up at $500.

Reasons to Show Contra Accounts on the Balance Sheet

Payments to insurance companies or contractors are common prepaid expenses that count towards current assets. The ratio of current assets to current liabilities is called the current ratio and is used to determine a company’s ability to fulfill short-term obligations. This means that it accounts for a reduction of the gross amount listed for the fixed assets with which it is paired. Depreciation is listed as a contra account on a company’s balance sheet.

• Contra asset accounts include allowance for doubtful accounts and accumulated depreciation.
• Even though it is listed along with assets, depreciation does not provide any economic value.
• Finally, take the total of depreciation and subtract it from total assets.
• The accumulated balance of depreciation increases over time, adding the amount of the depreciation expense recorded during the current period.
• Most accounts receivable would just be the time between purchase and credit card settlement.
• Accumulated depletion accounts for the reduction of value in a natural resource.
• Another contra asset listed on the balance sheet is accumulated depreciation.

Therefore, a contra asset account is credited in order to reduce the amount of the asset. The most known type of a contra asset account is the Accumulated Depreciation which reduces the amount of Fixed Assets. An example of a contra account is Accumulated Depreciation which is a contra asset account. Contra asset accounts can be used in a variety of areas, but there are three contra asset examples that you should pay close attention to. The proper size of a contra asset account can be the subject of considerable discussion between a company controller and the company’s auditors.