Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and https://accounting-services.net/ the value of the asset. Allowance for doubtful accounts is netted from the accounts receivable 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. Allowance for doubtful accounts offsets a company’s accounts receivable account. Accumulated depreciation offsets a company’s real property assets, such as buildings, equipment and machinery. Accumulated deprecation represents the cumulative amount of depreciation expense charged against an asset.

What are the different types of contra accounts?

Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value. Home Depot reports net receivables and net property and equipment, implying that both are reduced by contra assets.

• Contra accounts are used to help a company report the original amount of a transaction as well as reductions that may have happened.
• In this way, the historical cost, the amount of write-off, and the book value of an asset can always be seen on the balance sheet.
• S6-2 Determining inventory costing methods Ward Hard ware does not expect costs to change dramatically and want…
• This means that the buyer can satisfy the $900 obligation if it pays $891 ($900 minus $9 of sales discount) within 10 days.

Contra accounts are important because they allow a company to follow the matching principle by recording an expense initially in the contra asset account. The contra asset account is later reduced when the expense is recorded. Business owners should understand the functions of contra is sales discount a contra account accounts and their importance to maintaining accurate financial records. A liability that is recorded as a debit balance is used to decrease the balance of a liability. Nonetheless, it is usually advisable to use a revenue account and a contra-revenue account when recording sales.

Example Contra Account – Allowance for Doubtful Accounts

Accounts Receivable AccountAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. This account is not classified as an asset since it does not represent a long-term value. It is not classified as a liability since it does not constitute a future obligation. The difference between an asset’s account balance and the contra account balance is known as the book value. Explain the recording of sales revenue under a perpetual inventory system. LIFO is said to favor the income statement, whereas, FIFO is said to favor the balance sheet.

• Contra-revenue transactions are reported in one or more contra-revenue accounts, that normally have a debit balance contrary to the credit balance in the typical revenue account.
• The balance sheet will show a gross fixed assets value, a contra account value for accumulated depreciation, and a net value.
• Expenses incurred by a business that are not related to the acquisition and sale of the products or services regularly offered for sale.
• That produce goods from raw materials and normally sell them to wholesalers.