What Is a Contra Account? The Motley Fool

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Contra asset accounts are asset accounts where the balance is a credit balance. They are called “contra” asset accounts because these accounts are contrary to normal accounts. Whenever the balance of a contra asset account increases (credit to the contra asset account), the increased amount is written off as an expense and is reported in the company’s income statement.

  • The aggregate balance in the allowance for doubtful accounts after these two periods is $5,400.
  • Contra accounts are a significant part of a company’s financial statements.
  • The use of Allowance for Doubtful Accounts allows us to see in Accounts Receivable the total amount that the company has a right to collect from its credit customers.
  • Accumulated amortization is an account similar to accumulated depreciation.
  • Companies often have a specific method of identifying the companies that it wants to include and the companies it wants to exclude.

To oppose the revenue made by a company, contra revenue accounts must have a debit balance. 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.

This account helps companies present a more accurate accounts receivable balance on the financial statements. Every contra asset account on a company’s accounting records will also have a pairing account. For example, accumulated depreciation will go along with related assets. The contra asset account, accumulated depreciation, is always a credit balance.

What Are the Different Types of Contra Accounts?

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). A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. 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 billion as of January 31, 2021.” Suppose a clothing business has sold $50,000 of inventory on credit.

  • However, the “Allowance for Doubtful Accounts” (or “Allowance for Uncollectible Accounts”) is a contra account related to the concept of bad debts.
  • By recording reductions in a separate account, companies can get better insights into their actual accounts.
  • When a company repurchases shares, it increases the fractional ownership of all remaining shareholders.
  • Let’s go over how they work and what the main types are, and then finish with an example.
  • In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000.

The net amount is often referred to as the carrying amount or perhaps the net realizable amount. The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount. This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms.

What Is a Contra Asset?

In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000. If the asset account had a credit balance or the contra asset account had a debit balance, this would indicate an error in the journal entries. Note that in accounting, the term “book value” is also used interchangeably with first in first out fifo advantages and disadvantages net value. Contra assets may be stated in separate line items on the balance sheet. Or, if they contain relatively minor balances, they may be aggregated with their paired accounts and presented as a single line item in the balance sheet. In either case, the net amount of the pair of accounts is referred to as the book value of the asset account in question.

Contra Account Definition, Types, and Example

In many different aspects of business, a rough estimation is that 80% of account receivable balances are made up of a small concentration (i.e. 20%) of vendors. 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. Two primary methods exist for estimating the dollar amount of accounts receivables not expected to be collected.

This requirement also comes from the accounting standard for inventories. Accumulated amortization is an account similar to accumulated depreciation. This account only relates to a company’s intangible assets rather than tangible. This account serves two purposes — tracking total depreciation expenses while providing you with the accurate book value of the asset being depreciated.

Presentation of Contra Assets

Contra accounts act like regular accounts on the balance sheet but have a unique purpose. Rather, it is an adjunct account or a valuation account that is added to the face value of the bonds to arrive at the carrying value (or book value) of the bonds on the balance sheet. Therefore, these companies must maintain an obsolete inventory reserve account to net off any unusable stock from the account.

Thus, netting off both will result in the final amount for the account. 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. The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold. 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.

What are Contra Accounts?

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. 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.

Contra asset accounts

The account Allowance for Doubtful Account is credited when the account Bad Debts Expense is debited under the allowance method. The use of Allowance for Doubtful Accounts allows us to see in Accounts Receivable the total amount that the company has a right to collect from its credit customers. The credit balance in the account Allowance for Doubtful Accounts tells us how much of the debit balance in Accounts Receivable is unlikely to be collected. Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable. They are used in case some customers won’t be able to pay the money they owe to the business. As mentioned, contra asset accounts are usually listed below their matching asset accounts, and the net values of those assets are written next to the contra accounts.