When we add the balances of these two assets, we will get the net book value or carrying value of the assets having a debit balance. Allowance for doubtful accounts is a common contra asset listed on a company’s balance sheet under accounts receivable.
For example, an asset expected to last for five years would have 3 + 2 + 1 for a total of six. For every asset you have in use, there is an initial cost and value loss over time . The following information is available from the financial records of X Company. Waggy Tails, a pet grooming company, purchases some equipment with a useful life of 10 years for $110,000. Once the useful life of the equipment is over, Waggy Tails can salvage $10,000. Costs to manufacture a product include direct materials, direct labor and overhead.
Assets are the things a business has that it uses to generate income and are accounted for by dividing them up into short-term and long-term assets. Revenue AccountRevenue accounts are those that report the business’s income and thus have credit balances. Revenue from sales, revenue from rental income, revenue from interest income, are it’s common examples. Accounts Receivable AccountAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. The proper size of a contra asset account can be the subject of considerable discussion between a company controller and the company’s auditors. The auditors want to ensure that reserves are adequate, while the controller is more inclined to keep reserves low in order to increase the reported profit level.
The contra asset still resides on the asset side of the equation, just with a credit balance. The purpose of a contra account is to reduce an asset account, such as accumulated depreciation, reducing a building asset account.
Contra revenue accounts reduce revenue accounts and have a debit balance. Contra Liability a/c is not used as frequently as contra asset accounts. The example for contra liability accounts includes, discount on bonds payable and discount on notes payable which carry normal debit balances.
For example, accumulated depreciation will go along with related assets. Similarly, allowance for receivables will pair with accounts receivable balances. These balances cannot offset asset accounts that do not relate to them. 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 nature. Therefore, contra asset accounts differ from other accounts that have a credit balance.
Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. Contra equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock. These matching expenses and revenues must be recorded on the balance sheet during the same accounting period.
Accumulated depreciation is the total amount of depreciation expense that has been recorded so far for the asset. Each time a company charges depreciation as an expense on its income statement, it increases accumulated depreciation by the same amount for that period.
Instead, it is reported at its full amount with an allowance for bad debts listed below it. Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off. 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.
A contra asset is an account that carries a natural credit balance even though most assets have a normal debit balance. Assets represent items a company owns and uses during business operations, such as cash, inventory, and prepaid expenses along with buildings, vehicles, and land. In the accounting equation — assets equal liabilities plus owners’ equity — the preceding items are all debits that increase the asset side of the equation.
⏩The purpose of contra entry is to indicate the transactions that effect both cash and bank balances. This entry does not affect the financial positions of a business.
When you record depreciation on a tangible asset, you debit depreciation expense and credit accumulated depreciation for the same amount. This shows the asset’s net book value on the balance sheet and allows you to see how much of an asset has been written off and get an idea of its remaining useful life. You don’t have to, yet even a small business will benefit by using the contra asset account for accounts receivable. This eliminates the need to write off large accounts receivable balances at year end since they’ve already been accounted for. Writing off your obsolete inventory in this manner allows you to expense the cost of the obsolete inventory while also decreasing your current inventory balance using the contra asset account. Contra asset accounts are used to track everything from depreciation expenses to returned merchandise. Learn what a contra asset is and how you can use these accounts in your small business.
Here, accounts receivable are decreased in the period when bad debt expense is incurred. However, bad debt expense can arise to the sales made in earlier periods.
Contra asset accounts get their name “contra” because they include a credit balance. These go against the normal asset accounts, which have a debit balance. 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. Overall, contra accounts are offsetting balances that are the opposite of specific accounts. There are several examples of contra accounts, including accumulated depreciation, accumulated depletion, accumulated amortization, allowance for receivables, etc.
Two of the most common examples of a contra account are the allowance for doubtful accounts and accumulated depreciation. In most cases, these accounts will not show up on a standard balance sheet, which is the financial statement that contains all asset accounts.
This account only relates to a company’s intangible assets rather than tangible. Any company that owns intangible assets such as software, patent, etc., will maintain an accumulated amortization account. Similar to depreciation, this account plays a significant role in representing the book value of a company’s assets. Contra Equity Account – A contra equity account has a debit balance and decreases a standard equity account. Treasure stock is a good example as it carries a debit balance and decreases the overall stockholders’ equity. Most businesses calculate depreciation and record monthly journal entries for depreciation and accumulated depreciation.
Accumulated depreciation is typically shown in the Fixed Assets or Property, Plant & Equipment section of the balance sheet, as it is a contra-asset account of the company’s fixed assets. Showing contra accounts such as accumulated depreciation on the balance sheets gives the users of financial statements more information about the company.
Companies must bring the balance of the discount on bonds payable account to zero over the life of the bond, which is accomplished through amortization. The amount recorded in the discount on bonds payable account is amortized to interest expense over the life of the bond. Amortization of the discount on bonds payable account decreases its balance and increases the balance in the interest expense account. As mentioned above, the primary situation in which contra asset accounts appear has to do with accumulated depreciation.
Two of the most popular depreciation methods are straight-line and MACRS. If it were to be categorized as a liability, this would create the incorrect impression that the reporting entity has a liability to a third party, which is not the case. This is more informative than reporting only the net amount of $15,000 . The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.
Contra asset accounts also help companies keep their general ledgers organized. By recording reductions in a separate account, companies can get better insights into their actual accounts. 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. A contra account is an account with a balance opposite the normal accounts in its category. Contra accounts are usually linked to specific accounts on thebalance sheetand are reported as subtractions from these accounts. In other words, contra accounts are used to reduce normal accounts on the balance sheet.
You record depreciation expense on the income statement and record accumulated depreciation as a contra asset account on the balance sheet. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value. In all probability, you will find accumulated depreciation listed as a credit balance just below the fixed assets accumulated depreciation is a contra asset account on the balance sheet. If you don’t see it next to the fixed assets, you may notice a column listing the net costs for property, plant, and equipment. In this case, you can head to the financial statement disclosures to find details about the book value of the company’s assets. Accumulated depreciation can be defined as the total amount of depreciation for a fixed asset that is charged to expense since that asset was acquired and made available for use.
Author: Donna Fuscaldo