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Contra Account Nature, Purpose & Examples

Contra Asset Account Examples

The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline. In terms of revenue, a Sales Allowance contra account may be used to record reductions in sales due to discounts, returns, or other allowances, ensuring that net revenue figures exclude these deductions. By diligently reconciling these accounts, an entity can ensure that its accounting records show an accurate depiction of asset values, which is vital for both internal decision-making and external reporting. Contra assets are essential in accounting for accurately presenting the net value of assets.

What Is a Contra Account?

A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger. The Notes Receivable account documents the total value of any promissory notes held by the company. Typically, these notes reflect purchases made on credit by your customers. To obtain a cash payout before the note reaches maturity, you can sell these notes to a bank or other financial institution for some price below the note’s face value. There is almost always a story behind data; a clarification or historical insight that changes the meaning behind raw figures. In a report, layering on that additional context can be easy, but in a general ledger, you have few options for conveying nuance and subtlety.

How to Record a Contra Account

Contra Asset Account Examples

A contra account carries a balance that is opposite to the normal balance of its related main account. Accounts Receivable is an asset account that represents the amount of money due to a business for goods or services that have been delivered or used but not yet paid for by customers. Contra asset accounts also provide a clear picture of the companies’ accumulation of assets.

  • A contra-asset account is an account that opposes the balances of other asset accounts.
  • The most common contra type, contra assets, records the loss in value of any asset accounts listed in your general ledger.
  • In bookkeeping, contra asset accounts are pivotal as they serve to reduce the balance of related asset accounts.
  • This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000.
  • When the two balances are offset against each other they show the net balance of both accounts.
  • Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement.

Allowance for doubtful accounts

  • This contra-asset account reduces the accounts receivable balance on the balance sheet to its net realizable value.
  • Contra liability, equity, and revenue accounts have natural debit balances.
  • To oppose the revenue made by a company, contra revenue accounts must have a debit balance.
  • Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances.

A focus on ethical behavior at the corporate level reinforces a broader norm of ethical behavior across other parts of society. CSR practices include donating money, resources or time to positive causes and organizations, such as local and national charities, educational programs, disaster relief and more. Rather than pay this cost up-front and tie up a significant chunk of capital, Show-Fleur makes this purchase on credit with a 90-day due date after invoicing.

The Allowance for Doubtful Accounts represents a contra asset account that reduces accounts receivable. This account estimates the portion of receivables that a company believes will not be collected, indicating a more accurate value of potential revenue. 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. To offset this, the allowance for doubtful accounts balance is adjusted via a credit, while the bad debt account is debited to balance out the AR account.

Assessing Valuation Allowances

Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. The auditors aim to keep the balances at their adequate levels, but the controller might want to keep them as low as possible to reduce expenses and maximize profit levels. Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values. We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R).

Examples of Contra Asset Accounts

Therefore, contra equity accounts have a debit balance to offset their corresponding equity balances. However, some asset accounts need a negative counterpart to reduce the balance of that account. The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense. Calculating and estimating allowances are crucial steps in financial reporting to ensure that a company’s balance sheet reflects accurate values for its assets.

Definition and Examples of Contra Assets

The amount is reported on the balance sheet in the asset section immediately below accounts receivable. Property, Plant, and Equipment (PP&E) and Accumulated DepreciationAnother key example involves property and equipment. When a business owns assets like machinery, the value of these assets decreases over time. Contra asset accounts like Accumulated Depreciation account for this decrease. Suppose a company purchases machinery for $50,000, which they expect to use over ten years. Each year, they may amortize $5,000, moving it to the Accumulated Depreciation account and reducing the book value of the machinery.

It is because clubbing together dissimilar transactions impedes any analysis. For example, we need separate accounts to hold the actual cost of property, plant and equipment (PPE) and related accumulated depreciation. If we record depreciation expense in the cost accounts directly, we will lose key information about the original cost of the assets and accumulated depreciation.

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