Unlike the three previously mentioned contra accounts, contra revenue accounts are not listed in the balance sheet but are written near the top of the income statement. Contra revenue accounts typically offset revenue accounts in a firm’s income statement. As mentioned, contra asset accounts usually have a negative value which is the same as a credit balance.
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What are the different types of contra accounts?
Including contra revenue accounts is important in the income statement because it shows the original amount of sales the firm has made, along with any factor that has reduced that amount. 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.
This depreciation is saved in a contra asset account called accumulated depreciation. The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment. The Top Bookkeeping Services for Nonprofit Companies balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. There are three contra asset accounts that commonly appear in an organization’s chart of accounts.
Why are contra asset accounts important for businesses?
The company’s contra asset account will record unusable or obsolete assets. Assets can become obsolete or unusable for a variety of reasons, such as getting sold or retired because of wear or inefficiency. And it’s particularly important to track and manage these assets. Obsolete inventory accounts are very important in dealing with this, especially when many smaller businesses struggle with obsolete assets regularly. The importance of contra asset accounts is generally to reduce the value of some related account. The contra asset account pulls the value of the combined accounts down, which in turn decreases the value of the second account as well, which is a normal account.
- Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset.
- That is because some of the bonds are issued at a discount, so this reduces the balance of their bonds payable.
- Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.
- Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value.
Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming. This type of account could be called the allowance for doubtful accounts or a 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. The amount is reported on the balance sheet in the asset section immediately below accounts receivable. The net of these two figures is typically reported on a third line.
Contra Asset Journal Entry Accounting
Allowance for receivables is an account that companies maintain to record possible bad debts. However, this account does not represent actual irrecoverable debts. Accumulated amortization is an account similar to accumulated depreciation. This account only relates to a company’s intangible assets rather than tangible.
- The Allowance for Doubtful Accounts carries a credit balance that reduces the total amount of accounts receivable to show the amount that the company expects to collect.
- In the realm of accounting, various techniques are used to ensure financial statements provide an accurate and comprehensive view of a company’s financial health.
- Contra revenue accounts typically offset revenue accounts in a firm’s income statement.
- The sales allowance shows the discounts given to customers when returning the product.
- When the amount recorded in the contra revenue accounts is subtracted from the amount of gross revenue, it equals the net revenue of a company.
- The net value of both these figures is usually reported on a third line.