There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra liabilities reduce liability accounts and carry a debit balance. Contra equity accounts carry a debit balance and reduce equity accounts.
What are the Benefits of Factoring Your Account Receivable?
If it does not issue credit sales, requires collateral, or only uses the highest credit customers, the company may not need to estimate uncollectability. In other words, contra revenue is a deduction from gross revenue, which results in net revenue. In footnote 3, the company reports, “Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 https://www.stevetuckerrealtor.com/blog/ billion as of January 31, 2021.” 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. 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 “net book value” of the individual asset.
- Overall, contra accounts are offsetting balances that are the opposite of specific accounts.
- Likewise, when you pay a bill, your cash account is reduced (credited) because you’re lowering the balance.
- Contra liability, equity, and revenue accounts have natural debit balances.
- To put it another way, a contra account is an account listed within a general ledger with the purpose of capturing the reduced value of a paired or related account when the two are added together.
- Contra liabilities reduce liability accounts and carry a debit balance.
A final word about contra asset accounts
This account only relates to a company’s intangible assets rather than tangible. Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a creditbalance. GAAP, the allowance for doubtful accounts represents management’s estimate of the percentage of “uncollectible” accounts receivable (i.e. the credit purchases from customers that are not expected to be paid). If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts.
Is Accounts Receivable a Contra Account?
- Conversely, for a contra asset account like depreciation, you would list all entries as a credit, carrying a negative total balance for the overall account.
- Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation.
- Instead, it is reported at its full amount with an allowance for bad debts listed below it.
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- Then, it aggregates all receivables in each grouping, calculates each group by the percentage, and records an allowance equal to the aggregate of all products.
A contra account is an asset account that is kept at either a negative or zero balance and is used on a balance sheet to offset the positive balance of a paired asset. To put it another way, a contra account is an account listed within a general ledger with the purpose of capturing the reduced value of a paired or related account when the two are added together. Instead, the existence of contra-asset accounts for companies will differ based on a company’s requirements. 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.
Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for 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. http://civilforum.com.ua/kompaniia-arsk-plast-krypnyi-proizvoditel-plastikovyh-okon-iz-pvh-profilei-exprof-v-tatarstane-otmetila-v-minyvshyu-sybboty-13-oktiabria-10-letnii-ubilei Then, the company will record a debit to cash and credit to accounts receivable when the payment is collected. You’ll notice that because of this, the allowance for doubtful accounts increases. A company can further adjust the balance by following the entry under the “Adjusting the Allowance” section above.
Likewise, when you pay a bill, your cash account is reduced (credited) because you’re lowering the balance. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete. Excess, stored inventory will near the end of its lifespan at some point and, in turn, https://ladylib.net/fb/php/a-daughter-for-christmas-kyetti-uilyams/a-daughter-for-christmas-kyetti-uilyams_GG_1.php result in expired or unsellable goods. In this scenario, a write-down is recorded to the reserve for obsolete inventory. The sales method applies a flat percentage to the total dollar amount of sales for the period. For example, based on previous experience, a company may expect that 3% of net sales are not collectible.
Asset Contra Account
Wages are calculated by the hour and then paid to the relevant employee sometimes in cash or by direct debit. When researching companies, the financial statement is a great place to start. Contra accounts are confusing at first, but, with a little study, understanding them becomes second nature.
For example, when your company borrows money, you would identify that debt in a Notes Payable account. Furthermore, if you subsequently pay off that debt early and capture a discount, the contra liability account — Discount Notes Payable — would record those savings. Another common contra liability account is a Discount on Bonds Payable account used by businesses that issue their own bonds.