Contra accounts act like regular accounts on the balance sheet but have a unique purpose. This general structure can be applied across all contra types, so if the parent contra account account has a credit, the contra account will have a debit. Similarly, if the parent account lists entries as debits, the contra account will appear as a credit.
What is the importance of Contra Asset Accounts?
Asset accounts usually have a positive value which is the same as a debit balance. You may use accounting software packages, such as QuickBooks Online to set up contra accounts. Simply hit Control + N under the Chart of Accounts or Edit, then click New (to create a new account). In a sales returns and allowances contra revenue account, you offset the balance in the sales revenue account. When the contra account reads $500 and the normal credit balance is $100,000, then your net sales are $99,500.
Taking a closer look at contra asset accounts
- If every single buyer had taken advantage of the early payment discount, the company would have provided roughly $10 thousand in discounts during that same timeframe.
- Accounts receivable is rarely reported on the balance sheet at its net amount.
- The use of a contra account allows a company to report the original amount and also report a reduction so that the net amount will also be reported.
- You may use accounting software packages, such as QuickBooks Online to set up contra accounts.
- Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off.
But sometimes, dissimilar transactions are important to consider together within a ledger. Sometimes, the current value of a note receivable will fall compared to its face value. This process will give rise to a contra asset account which is the discount on notes receivables.
Obsolete Inventory
- The company can recover the account by reversing the entry above to reinstate the accounts receivable balance and the corresponding allowance for the doubtful account balance.
- Both the asset and the corresponding contra asset accounts must be stated clearly in the balance sheet.
- Note that the debit to the allowance for doubtful accounts reduces the balance in this account because contra assets have a natural credit balance.
- Offsetting the asset account with its respective contra asset account shows the net balance of that asset.
Utilizing contra accounts in financial accounting has several significant advantages that enhance financial transparency and enable more effective financial management. 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.
- Revenue is an income statement account, but it flows through to the equity section of retained earnings as well.
- The Allowance for Doubtful Accounts carries a credit balance that reduces the total amount of accounts receivable to show the amount that the company expects to collect.
- If it does not issue credit sales, requires collateral, or only uses the highest credit customers, the company may not need to estimate uncollectability.
- The contra liability account is less common than the contra asset account.
- The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold.
- This requirement also comes from the accounting standard for inventories.
Contra assets
The two most common contra accounts on a balance are accumulated depreciation and the allowance for doubtful debts. Accumulated depreciation tallies the depreciation to date of a fixed asset, such as a car or a building. The contra equity account treasury stock is reported right on the balance sheet.
Contra account examples
Because contra asset accounts are used so frequently, it’s worth spending a little bit more time on them here, including common subtypes. A contra account is a negative account that is netted from the balance of another account on the balance sheet. The two most common contra accounts are the allowance for doubtful accounts/bad debt reserve, which is subtracted from accounts receivable, and accumulated depreciation, which is subtracted from fixed assets. Contra asset accounts are a type of contra account that net off against asset accounts. These include accumulated depreciation, accumulated amortization, allowance for receivables, obsolete inventory, and discount on notes receivables. However, the “Allowance for Doubtful Accounts” (or “Allowance for Uncollectible Accounts”) is a contra account related to the concept of bad debts.
- Note that the contra liability account has a positive balance (a debit balance), and the liability account normally has a credit balance.
- Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance.
- Every contra asset account on a company’s accounting records will also have a pairing account.
- The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount.
- Examples of revenue contra accounts are Sales Discounts, Returns and Allowances.
- Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset.
For example, a company may assign a heavier weight to the clients that make up a larger balance of accounts receivable due to conservatism. For example, a company has $70,000 of accounts receivable less than 30 days outstanding and $30,000 of accounts receivable more than 30 days outstanding. Based on previous experience, 1% of accounts receivable less than 30 days old will be uncollectible, and 4% of those accounts receivable at least 30 days old will be uncollectible.
Contra equity account
