In this example, the company often assigns a percentage to each classification of debt. Then, it aggregates all receivables in each grouping, calculates each group by the percentage, and records an allowance equal to the aggregate of all products. Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a creditbalance. If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts. For example, when depreciating an asset, the accumulated depreciation account is used to reduce the book value of the asset while also keeping track of the total amount of depreciation that has been posted to date. In footnote 3, the company reports, “Net property and equipment includes accumulated depreciation and amortization of $25.3 billion as of August 1, 2021 and $24.1 billion as of January 31, 2021.”
Understanding contra accounts
An asset account which is expected to have a credit balance (which is contrary to the normal debit balance of an asset account). For example, the contra asset account Allowance for Doubtful Accounts is related to Accounts Receivable. The contra asset account Accumulated Depreciation is related to a constructed asset(s), and the contra asset account Accumulated Depletion is related to natural resources.
How to Use Contra Asset Accounts
There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra liabilities reduce liability accounts and carry a debit balance.
Double Entry Bookkeeping
A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. Whether reported as separate lines on the financial report or as a cumulative value, the net amount of the pair of accounts is called the “net book value” of the individual asset. You can estimate the total to record in the allowance for doubtful accounts based on uncollectible revenue totals from the previous year or you can conservatively estimate the amount. Taking the example of CCC again, the company has $50,000 in accounts receivable at year-end of December 31. CCC estimates that 5% of accounts receivable will most likely be unrecoverable.
- The most prominent of these include allowing companies to present a more accurate picture of their assets.
- When a contra asset account is first recorded in a journal entry, the offset is to an expense.
- The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable.
- A key example of contra liabilities includes discounts on notes or bonds payable.
- Some companies may classify different types of debt or different types of vendors using risk classifications.
The Contra Revenue Account
However, it will also have a negative accumulated depreciation of $60,000, offsetting that cost. However, there are some prevalent contra-asset accounts https://www.kinodrive.com/celebrity/chris-casper-kelly-61140/ that may exist for all companies. This account offsets the balance in the respective asset account that they pair with on the balance sheet.
Is Premium on Bonds Payable a Contra account?
The second method of estimating the allowance for doubtful accounts is the aging method. All outstanding accounts receivable are grouped by age, and specific percentages are applied to each group. The aggregate of all group results is the estimated uncollectible http://urbanroots.ru/en/archives/4463 amount. Companies technically don’t need to have an allowance for doubtful account. If it does not issue credit sales, requires collateral, or only uses the highest credit customers, the company may not need to estimate uncollectability.
The first step in accounting for the allowance for doubtful accounts is to establish the allowance. This is done by using one of the estimation methods above to predict what proportion of accounts receivable will go uncollected. For this example, let’s say a company predicts it will incur $500,000 of uncollected accounts receivable. Though the Pareto Analysis can not be used on its own, it can be used to weigh accounts receivable estimates differently. For example, a company may assign a heavier weight to the clients that make up a larger balance of accounts receivable due to conservatism.
- The balance may be estimated using several different methods, and management should periodically evaluate the balance of the allowance account to ensure the appropriate bad debt expense and net accounts receivables are being recorded.
- By recording reductions in a separate account, companies can get better insights into their actual accounts.
- Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting.
- Offsetting the asset account with its respective contra asset account shows the net balance of that asset.
- In this example, the company often assigns a percentage to each classification of debt.
Example of a Contra Account
Any products that are sold at a discount or returns are deducted from gross revenue to produce net revenue as the top line on the income statement. The revenue contra accounts Sales Returns, Discounts and Allowances are subtracted from the main Sales Revenue account to present the net balance on a company’s income statement. Every http://russkialbum.ru/2015/06/06/foxit-phantompdf-business-7150425-final.html on a company’s accounting records will also have a pairing account.