contra account definition and meaning
Contra asset accounts help companies record any reductions to their non-current and current assets. By doing so, they can bring their asset accounts to a more accurate position. Contra asset accounts are necessary for companies for What is the Average Cost of Bookkeeping Services for Non-Profit Agencies? various reasons. The most prominent of these include allowing companies to present a more accurate picture of their assets. Instead, the existence of contra-asset accounts for companies will differ based on a company’s requirements.
Sometimes, it is important to keep the original balance of the accounts and create the contra accounts to be able to calculate the net value of the account. The definition can be expanded to include contra accounts in general. Contra accounts act like regular accounts on the balance sheet but have a unique purpose. The difference between an asset’s Accounting for Tech Startups: What You Need To Know account balance and the contra account balance is known as the book value. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. The allowance method of accounting allows a company to estimate what amount is reasonable to book into the contra account.
How are Contra Accounts Used and Reported?
Contra asset accounts have a credit balance as compared to a debit balance that most other types of accounts have. Before we start talking about the finer details, it’s important to know what is a contra asset account. Sometimes, both accounts can be written in a single line if they don’t represent a large portion of the assets. In case the contra asset account is not listed in the balance sheet, it must be listed in the footnotes of the financial statement for the users to be informed. Another contra asset account is Allowance for Doubtful Accounts. This account appears next to the current asset Accounts Receivable.
A contra account is an account that companies use to reduce the value of a related account. It usually nets off against related accounts and provides an opposite effect to the balance. Therefore, contra accounts are the reverse accounts that decrease a specific account’s balance. Revenue is shown on the income statement as a credit, it is the amount of revenue a business earns in a period.
Contra Asset, Contra Liability and Contra Equity
A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting. Notes receivables are promissory notes that include a promise from a borrower to repay a lender. For companies, these represent receivables from various parties. Companies that hold inventories for a long time may face accumulating obsolete inventory. The accounting entries for accumulated depreciation are as follows.
Allowance for receivables is an account that companies maintain to record possible bad debts. However, this account does not represent actual irrecoverable debts. 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. 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).
Is Premium on Bonds Payable a Contra account?
Treasure stock is a good example as it carries a debit balance and decreases the overall stockholders’ equity. Treasury stock represents shares of a company’s own stock that it has repurchased from shareholders but not retired. Instead of increasing assets or decreasing liabilities (as would be typical when spending cash), buying treasury stock reduces shareholders’ equity.
Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities includes discounts on notes or bonds payable. Contra liability accounts are not as popular as contra asset accounts.
Contra Asset Journal Entry Accounting
In this way, the historical cost, the amount of write-off, and the book value of an asset can always be seen on the balance sheet. The accounting entries for allowance for receivables https://turbo-tax.org/best-law-firm-accounting-software-in-2023/ are as follows. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.
