A regular asset account typically carries a debit balance, so a contra asset account carries a credit balance. Two common contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts represents the percentage of accounts receivable a company believes it cannot collect.
When we add the balances of these two assets, we will get the net book value or carrying value of the assets having a debit balance. This type of account can equalize balances in the asset account that it is paired with on a business’s balance sheet. The contra asset account has https://accounting-services.net/ credited balances that can reduce the balance in its paired asset account. A company can choose to state this information as separate line items on its balance sheet so that any financial planners or analysts can determine the extent to which a paired asset might be reduced.
What is a Contra Asset Account?
The complete accounting equation based on the modern approach is very easy to remember if you focus on Assets, Expenses, Costs, Dividends . All those account types increase with debits or left side entries. Conversely, a decrease to any of those accounts is a credit or right side entry.
A contra account is an account whose balance is the opposite of a corresponding account. In finance, a contra account reduces the value of related or corresponding account. It offsets the balance of the related account, which means when the corresponding account is positive, a contra account will be negative. 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.
Once collected, remove the account receivable by debiting cash and crediting the accounts receivable account. Accounts not collected are to be reviewed to determine the need for a write-off. If a reserve account is established the entry is to debit reserve account/credit accounts receivable.
From the bank’s point of view, when a credit card is used to pay a merchant, the payment causes an increase in the amount of money the bank is owed by the cardholder. From the bank’s point of view, your credit card account is the bank’s asset.
Depreciation Expense Account Vs. Allowance for a Depreciation Account
This type of account could be called the allowance for doubtful accounts or bad debt reserve. The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. Account receivable balances must be supported by records that substantiate the amount due and these records must be maintained for audit purposes. Records of accounts receivable written-off are to contain the reason for the write-off and must be maintained for audit purposes. To maintain proper segregation of duties, collection of accounts receivable should be performed by individuals within the business unit who are not responsible for billing and recording accounts receivable. The University of Louisville and its related organizations report income on the accrual basis of accounting in accordance with Government Accounting Standards Board guidelines.
This receivable is offset by a reduction of the original expenses incurred. Substantive records/supporting documentation – Support generated from a source separate from the general ledger that corroborates the existence of the account receivable. For accrual accounting, you need to credit one account and debit another. If an account is increased by one account, it is decreased by the other. If you want to compare your business’s revenue from period to period, look at your operating revenue. This gives you more of an idea of whether your company is growing or declining since non-operating revenue is irregular.
What Are the Different Types of Contra Accounts?
Discounts on notes receivable – Transactions shown here are based on the amount of money owed on liabilities like loans. The company will have to maintain separate human resources for such accounting. Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. IDENTIFY revenue generating activities, such as providing goods or services.
Apple breaks out its amount of property, plant, and equipment (PP&E) and then lists its accumulated deprecation that reduces the PP&E figure. A contra revenue account allows a company to see the original amount sold and to also see the items that reduced the sales to the amount of net sales. So, the company’s total value of receivables results in $95,000, and Power Manufacturers may then adjust this calculation in their financial records as they receive more credit sales. Power Manufacturers, Inc. purchases new contra revenues account definition and meaning machinery for a total of $300,000. The company projects that the equipment will be usable for six years, and it subtracts a 16% yearly depreciation rate from the initial value to calculate the amount of depreciation over the next six years. Therefore, the depreciation of the equipment increases by approximately $50,000 for each year of use. This method uses the initial purchase value and subtracts the accumulated depreciation value for the time period to result in the total value of the equipment after its use.
What Is the Benefit of Using a Contra Account?
The first step in identifying such problems is to carefully monitor sales returns and allowances in a separate, contra‐revenue account. Debits and credits are traditionally distinguished by writing the transfer amounts in separate columns of an account book. Alternately, they can be listed in one column, indicating debits with the suffix „Dr“ or writing them plain, and indicating credits with the suffix „Cr“ or a minus sign. Despite the use of a minus sign, debits and credits do not correspond directly to positive and negative numbers. When the total of debits in an account exceeds the total of credits, the account is said to have a net debit balance equal to the difference; when the opposite is true, it has a net credit balance. Debit balances are normal for asset and expense accounts, and credit balances are normal for liability, equity and revenue accounts. Expense accounts are technically contra equity accounts because they are linked to another equity account, revenue, and maintain an opposite balance.
However, if the billing office stopped there, you would overstate your assets and net income. You must also report the amount that you can reasonably expect will not be paid, if it is estimable and probable. You could simply adjust the parent account…but then you are missing an essential part of the story — how many patients were actually treated today for a sprain. Accumulated depreciation – This is the value of depreciated value shown on an asset over time. Depreciation is the loss of value for something through time and usage. Accumulated depreciation shows a reduced overall value for assets like buildings, machines, and vehicles.