Therefore, a contra expense account that contains a debit balance must have a negative ending balance. Now let’s focus our attention on the two most common contra assets – accumulated depreciation and allowance for doubtful accounts. The book value of an asset is the value of the asset recorded in the company’s balance sheet.
What is a contra expense account?
What is a Contra Expense? A contra expense is an account in the general ledger that is paired with and offsets a specific expense account. The account is typically used when a company initially pays for an expense item, and is then reimbursed by a third party for some or all of this initial outlay.
Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. Net receivables are the money owed to a company by its customers minus the money owed that will likely never be paid, often expressed as a percentage. Bad debt expense is an expense that a business incurs once the repayment of credit previously extended to a customer is estimated to be uncollectible. However, if you sell items that quickly become obsolete, such as consumable products with an expiration date or electronics that become quickly outdated, using the allowance for obsolete inventory is a must. If you keep a lot of inventory in stock, chances are that some of the inventory will become obsolete. This frequently happens to manufacturing companies that sell products with an expiration date since any inventory remaining in stock past the expiration date quickly becomes obsolete.
Closing Entries, Sales, Sales Returns & Allowances in Accounting
Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts reduce accounts receivable, while accumulated deprecation is used to reduce the value of a fixed asset. Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset. Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. A contra account is used for account classification and is also reported in a company’s financial statement alongside its corresponding or related account.
Is contra expense account an asset?
What is a Contra Account? In bookkeeping, a contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit (negative) balance. The account offsets the balance in the respective asset account that it is paired with on the balance sheet.
This type of reporting allows anyone analyzing the balance sheet to understand much more about the company and its assets than if they were to simply look at the net value of the depreciated asset. By reflecting both accounts on the balance sheet, analysts can understand both the original price and the total decrease in value of a certain asset over time. Accumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset’s purchase price and its carrying value on the balance sheet. The transactions made in this account are reported on a company’s financial statements directly under the related account. For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parentaccount gross balance to present the net balance.
Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement. The “Accumulated Depreciation” line item is the contra asset account reflected on the balance sheet, but often they are combined as “PP&E, net”. An allowance for doubtful accounts is a contra-asset account that reduces the total receivables reported to reflect only the amounts expected to be paid. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account.
If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting. For instance, it is common to keep the purchase price of a piece of equipment as a historical cost in the debit asset account when it comes to fixed assets. A contra equity account reduces the total number of outstanding shares listed on a company’s balance sheet. When a company buys back its own shares from the open market, it records the transaction by debiting the treasury stock account. A company may decide to buy back its shares when management feels the stock is undervalued or because it desires to pay stock dividends to its shareholders.
Types of Contra Assets
Accumulated Depreciation account for the respective asset account which is contra-asset account. As the name suggests Contra account is any account which is opposite in nature with respect to a certain account i.e. its balance is opposite to the balance of an account against which contra account is maintained. Accounts in any business hold important information regarding different contra expense account aspects of the entity and its operations. And to keep the information relevant and reliable these accounts needs to be updated to record all such transactions that relates to particular account. For example, funds deposited in the bank account and withdrawn are recorded in the Bank account. If you’re using the wrong credit or debit card, it could be costing you serious money.
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- Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset.
- The net of these two figures is typically reported on a third line.
- By reflecting both accounts on the balance sheet, analysts can understand both the original price and the total decrease in value of a certain asset over time.
- Instead of debiting the asset account directly, the contra asset account balance will be credited separately.
- Credit BalanceCredit Balance is the capital amount that a company owes to its customers & it is reflected on the right side of the General Ledger Account.
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If you buy a pair of shoes from your supplier for $20, that’s a cost, but it’s not yet an expense. That’s because, as far as accounting is concerned, you haven’t really “spent” $20. You’ve just converted $20 worth of cash into $20 worth of shoes; an asset that remains in your inventory. Since you no longer have the shoes, aka the asset, you record a $20 expense on your income statement, But you also record $30 in revenue from the sale, so your net income is $10.
What Is the Benefit of Using a Contra Account?
Explain when to use allowance for doubtful accounts and bad debt expense. Units should consider using an allowance for doubtful accounts when they are regularly providing goods or services “on credit” and have experience with the collectability of those accounts. The following entry should be done in accordance with your revenue and reporting cycles , but at a minimum, annually.