For example, a company may know that its 10-year average of bad debt is 2.4%. Therefore, it can assign this fixed percentage to its total accounts receivable balance since more often than not, it will approximately be close to this amount. The company must be aware of outliers or special circumstances that may have unfairly impacted that 2.4% calculation. If the following accounting period results in net sales of $80,000, an additional $2,400 is reported in the allowance for doubtful accounts, and $2,400 is recorded in the second period in bad debt expense. The aggregate balance in the allowance for doubtful accounts after these two periods is $5,400.
How are Contra Accounts Used and Reported?
- For example, say the company now thinks that a total of $600,000 of receivables will be lost.
- In bookkeeping terms, a contra asset account refers to an account which is offset against an asset account.
- Similarly, allowance for receivables will pair with accounts receivable balances.
- 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.
Thus, netting off both will result in the final amount for the account. The company now has a better idea of which account receivables will be collected and which will be lost. For example, say the company now thinks that a total of $600,000 of receivables will be lost.
Definition and Examples of Contra Assets
For example, accumulated depreciation will go along with related assets. Therefore, contra-asset accounts differ from other accounts that have a credit balance. If a company http://samodelnaya.ru/index.php?option=com_content&view=article&id=102:2017-11-19-18-02-59&catid=18:2012-04-17-14-33-00&Itemid=12 has a history of recording or tracking bad debt, it can use the historical percentage of bad debt if it feels that historical measurement relates to its current debt.
What Is a Contra Liability Account
Accumulated depreciation is a http://geoman.ru/books/item/f00/s00/z0000054/st040.shtml 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. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Accumulated depreciation reflects the reduction in value of a fixed asset. A debit will be made to the bad debt expense for $4,000 to balance the journal entry.
Examples of Contra Accounts
Home Depot also devotes footnote 4 to its share repurchase program and reports that the company is authorized by its board to repurchase $20 billion in shares. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees. Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.
In either case, using these accounts can help you better manage depreciation expense, keep your accounts receivable balance accurate, and properly dispose of and account for obsolete inventory. http://msp-highway.com/fr/press/news/273/?print=y&url=%2Ffr%2Fpress%2Fnews%2F273%2Fs provide business owners with the true value of certain asset accounts. For example, let’s say your accounts receivable balance is currently $11,500, but you’re not entirely sure that you’ll be able to collect the entire balance due. Asset accounts always maintain a debit balance, so anytime that you increase the value of an asset, such as when you deposit customer payments or invoice a customer, that asset account is debited or increased. Likewise, when you pay a bill, your cash account is reduced (credited) because you’re lowering the balance.
Contra accounts are worth a look
- Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance.
- While assets have natural debit balances and increase with a debit, contra assets have natural credit balance and increase with a credit.
- The two most common examples of contra asset accounts are the accumulated depreciation contra account, and the allowance for doubtful debts contra account.
- The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount.
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.
Is Treasury Stock a Contra Account?
In the above example, the debit to the contra liability account of $100 lets the company recognize that the bond was sold at a discount. Note that accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. As mentioned, companies do not represent these accounts on the balance sheet. However, they will still appear on the notes to the financial statements with necessary disclosures. Instead, the existence of contra-asset accounts for companies will differ based on a company’s requirements. 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.