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. However, some asset accounts need a negative counterpart to reduce the balance of that account. The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. A contra asset is paired with an asset account to reduce the value of the account without changing the historical value of the asset.
Equity Contra Account
- Make sure that you report contra accounts on the same financial statement as the related accounts.
- Obsolete, Unsold and Unusable Inventory are contra asset accounts with a credit balance that reduce the normal debit balance of the main Inventory asset account in order to present the net value of inventory on a company’s balance sheet.
- This transaction is more fully explained in our sales on account example.
- A contra asset account is an asset account where the account balance is a credit balance.
- However, these vehicles have experienced significant wear and tear in the intervening years.
Instead, an adjusting journal entry is done to record the estimated amount of bad debt. 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. The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline. There is almost always a story behind data; a clarification or historical insight that changes the meaning behind raw figures. In a report, layering on that additional context can be easy, but in a general ledger, you have few options for conveying nuance and subtlety. Namely, within a ledger, each account is intended to contain transactions and balances of a similar type only.
Double Entry Bookkeeping
She has worked in multiple cities covering breaking news, politics, education, and more. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Master accounting topics that pose a particular challenge to finance professionals. Still, the dollar amounts are separately broken out in the supplementary contra expense account sections most of the time for greater transparency in financial reporting. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.
- 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.
- A company may choose to simply present its net sales in its income statement, rather than breaking out the gross sales and sales discounts separately.
- You would debit $50,000 as Accounts Receivable and credit $50,000 as Sales.
- For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense.
- This is because the initial accounting journal entry at the time of sale was a debit to Accounts Receivable asset account and credit to a Sales Revenue account.
- Sales discounts are also known as cash discounts or early payment discounts.
- If the customer pays within 10 days then a 2.5% sales discount amounting to 50 can be deducted from the sales invoice, and the customer will pay only 1,950 to settle the account.
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- The Notes Receivable account documents the total value of any promissory notes held by the company.
- You can use contra accounts to record the goods your customers return, inventory that gets damaged, and equipment depreciation.
- In spite of its name, contra liabilities function more similarly to assets.
- For the recent year, the company had gross sales of $510,000 and had sales discounts of $4,000 and sales returns and allowance of $5,000.
- As mentioned, businesses use contra revenue accounts to understand net vs. gross revenue.
For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. Both cash or sales discount and allowance for sales discount is the same.
(A debit balance in a contra asset account will violate the cost principle.) Learn more about contra asset accounts. If a company offers an early payment discount (such as 1% or 2% of the invoice amount if it is paid within 10 days instead of the required 30 days) the amount of the discount is recorded in the contra revenue account Sales Discounts. Again, the company’s management will see the original amount of sales, the sales discounts, and the resulting net sales. Properly documenting these contra accounts in your ledger can sometimes feel counter-intuitive since they operate in an opposite manner from their parent accounts.
Do Contra Accounts Have Debit or Credit Balances?
Note that the contra liability account has a positive balance (a debit balance), and the liability account normally has a credit balance. Hence, the book value of the liability will be the credit balance of the liability account minus the debit balance of its contra liability counterpart. Contra liability accounts are special accounts in the liabilities section of the balance sheet. This would let users of the financial statements calculate the book value of the liability. For example, if your business has accounts receivable of $50,000 and an allowance for doubtful debts account totalling $5,000, the net accounts receivable is $45,000.
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