contra asset account definition

Assets And Liabilities

The amount of gross revenue minus the amount recorded in the contra revenue accounts equal a company’s net revenue. A transaction is made under the sales return account when a customer returns contra asset account definition a product to the company for a refund. Sales allowance represents discounts given to customers to entice them to keep products instead of returning them, such as with slightly defective items.

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. This type of asset account is referred to as “contra” because normal asset accounts might include a debit, or positive, balance, and contra asset accounts can include a credit, or negative, balance. Because of the oppositional nature of these asset accounts, the contra account acts as a ‘contrary’ element to the debit balances of regular asset accounts. Furthermore, a contra asset account may also be regarded as a negative asset account because equalizing an asset account and contra asset account results in the asset’s net, or total, balance.

Credit sales refer to a sale in which the amount owed will be paid at a later date. In other words, credit sales are purchases made by customers who do not render payment in full, in cash, at the time of purchase. In accounting, accrued interest refers to the adjusting entries interest that has been incurred on a loan or other financial obligation but has not yet been paid out. Bad debt expense is an expense that a business incurs once the repayment of credit previously extended to a customer is estimated to be uncollectible.

Prior to January 2, ABC has a commitment but will not have a liability. Unearned Revenue should be credited because ABC has not earned the $1,000 and ABC has an obligation to perform the service in the future.

Debit What Comes In And Credit What Goes Out

If a debit is the natural balance recorded in the related account, the contra account records a credit. The book value of a corporation is the total amount of stockholders’ equity https://supersavelangkawi.com/2020/03/03/does-overhead-include-payroll/ reported on the balance sheet. The total amount reported for stockholders’ equity is the approximate fair value or net worth of the corporation as of the balance sheet date.

contra asset account definition

Accumulated depreciation accounts are asset accounts with a credit balance . It is considered a contra asset account because it contains a negative balance that intended to offset the asset account with which it is paired, resulting in a net book value. Discount on notes receivable refers to a contra asset account that occurs when the current value of a note receivable amounts to less than the face value of the note.

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.

Obsolete inventory refers to a company’s products or goods that have become obsolete, or unusable, during routine use and operations. This type of contra asset account may generally be debited expenses, followed by a credit to the company’s contra asset account for recording unusable inventory. Similarly, contra asset account definition a business may also write off these types of expenses from its financial records if the inventory has been completely phased out. The contra asset account can also be combined with a current inventory account, allowing a financial analyst to determine the current market value of the company’s inventory.

What is contra current asset?

A contra asset account is an asset account where the account balance is a credit balance. It is described as “contra” because having a credit balance in an asset account is contrary to the normal or expected debit balance. (A debit balance in a contra asset account will violate the cost principle.)

In accounting terms, an expense is a cost incurred to produce revenue reported on the income statement. If you buy a pair of shoes from your supplier for $20, that’s a cost, but it’s not yet an expense. That’s because, as far as accounting is concerned, you haven’t really “spent” $20. You’ve just converted $20 worth of cash into $20 worth of shoes; an asset that remains in your inventory.

Contra Asset Account

The amount reported on the balance sheet for Property, Plant and Equipment is the company’s estimate of the fair market what are retained earnings value as of the balance sheet date. Liabilities Increased In December an expense and a liability are recorded.

contra asset account definition

It’s also a tax write-off, as you can claim depreciation as a deduction. Learn what contra accounts are, how they serve a useful purpose for bookkeepers, and how easy they are to set up.

  • Sometimes the balances in the two accounts are merged for presentation purposes, so that only a net amount is presented.
  • If the related account is an asset account, then a contra asset account is used to offset it with a credit balance.
  • A contra account offsets the balance in another, related account with which it is paired.
  • Contra accounts appear in the financial statements directly below their paired accounts.

The lender may offer the company a discount if it repays the note early. The discount on notes payable reduces the total amount of the note to reflect the discount given by the lender. Unearned revenue is a phenomenon in accrual basis accounting when a business has received payment for goods or services that it has not yet rendered to its customers.

Similarly, accumulated depreciation accounts reduce the value of the fixed assets you report on your financial statements. Allowance for uncollectible accounts, or allowance for doubtful accounts, is one of the most common contra current asset accounts.

Revenue is only increased when receivables are converted into cash inflows through the collection. https://accounting-services.net/ Revenue represents the total income of a company before deducting expenses.

The resulting credit balances in these types of accounts may typically be amortized as interest revenue over the course of the note’s viable lifetime. Current liability, when money only may be owed for the current accounting period or periodical. 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.

The most common types of prepaid expenses are prepaid rent and prepaid insurance. Journal Entries are the building blocks of accounting, from reporting to auditing journal entries . Without proper journal entries, companies’ financial statements would be inaccurate and a complete mess. A fiscal year is a 12 month or 52 week period of time used by governments and businesses for accounting purposes to formulate annual financial reports. Modified book value is an asset-based method of determining how much a business is worth by adjusting the value of its assets and liabilities according to their fair market value.

Income Statement Explained

contra asset account definition

The contra revenue accounts commonly used in small-business accounting include sales returns, sales allowance and sale adjusting entries discounts. A contra revenue account carries a debit balance and reduces the total amount of a company’s revenue.

Other tools include mainframe computers and information retrieval or search software. Each of the following accounts is either an Asset , Contra Account , Liability , Shareholders’ Equity , Revenue , Expense or Dividend account.