Contra asset definition

What is a Contra Asset Account

Accumulated depreciation is the total of all depreciation that has been charged to existing fixed assets such as equipment and buildings. There can be hidden value in stocks that have a lot of fully depreciated buildings. Companies like to depreciate assets as quickly as possible to get the tax savings, so the balance sheet may not state the true value of fixed assets. The accumulated depreciation account plays a vital role in representing the accurate value of an asset in the financial statements. In essence, contra-asset accounts have a negative balance while other asset accounts have a positive balance. Both of these accounts offset each other to represent a net balance on a company’s balance sheet.

Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities includes discounts on notes or bonds payable. Contra liability accounts are not as popular as contra asset accounts.

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Every contra asset account on a company’s accounting records will also have a pairing account. For example, accumulated depreciation will go along with related assets. Although contra-asset accounts have credit balances, they do not appear in liabilities or equity. Usually, credit balances include items from one of those two natures. The accumulated depreciation account is perhaps the most common contra asset account used by business owners.

Similarly, these accounts can also be essential in various calculations. For example, after six years, the asset’s book value on the balance sheet will be $40,000. However, it will also have a negative accumulated depreciation of $60,000, offsetting that cost. However, a contra-asset account usually has a credit or nil balance. This account offsets the balance in the respective asset account that they pair with on the balance sheet. If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts.

The Contra Asset Account

It’s most often used by older individuals who are trying to qualify for Medicaid long-term care services. Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers. The amount is not reported, and the net Accounting & Financial Planning Services for Attorneys and Law Firms sales amount is reported on the income statement. Similarly, it allows companies to retrieve original account balances without complicated calculations. For stakeholders, looking at both accounts is also crucial in their decision-making process.

What is a Contra Asset Account

This helps the firms to evaluate the book value of their assets and liabilities. 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 https://business-accounting.net/bookkeeping-for-solo-and-small-law-firms/ “net book value” of the individual asset. Placing things like a second home or a retirement account inside an asset protection trust prevents these items from being counted against you during Medicaid eligibility.

Contra asset accounts

When a Medicaid recipient dies, the state in which they received Medicaid can attempt to collect reimbursement for long-term care expenses from the deceased person’s estate. However, the state can’t come after those assets if they’re placed in an asset protection trust. Depending on the state, domestic asset protection trusts https://accounting-services.net/a-cpas-perspective-why-you-should-or-shouldnt-work/ can be used to avoid or lower state income taxes. So long as the trust is established in a state with no state income tax (such as Alaska or Wyoming), the assets inside the trust aren’t subject to state taxes. An asset protection trust is an estate planning tool that shields a person’s assets from creditors and lawsuits.