What are Contra Accounts?

In a sense, a contra asset account is a negative asset account that detracts from all of the other assets included in the balance sheet. More specifically, record the contra asset as a credit that is supposed to balance out a correlating plant https://www.archyde.com/how-do-bookkeeping-and-accounting-services-affect-the-finances-of-real-estate-companies/ asset. The situations that contra asset accounts appear are the ones dealing with Depreciation, which will be explored below. Examples of contra accounts include Allowance for Doubtful Accounts, Accumulated Depreciation, and Return on Sales.

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• 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.
• Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock.
• Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable.
• It is shown as a reduction to the asset account and is reversed when the asset is disposed of.
• Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance.

By the end of 2nd-year, the machinery balance will still be $100,000, and accumulated depreciation will show $40,000. The netbook value of the machinery by the end of the first year will be $80,000 ($100,000-$20,000) and $60,000 ($100,000-$40,000) by the end of the second year. This method helps a third person identify what the book value was at the time of purchase and the remaining value of an asset.

What is Contra Account?

The impact to the income statement includes the original sale, the contra account for returns, and the debit to expenses for estimated uncollectible based on net receivable. The balance sheet impact includes the remaining account receivable after returns and the estimated uncollectible. Since the entry for cash sales is recorded as a credit in a revenue account, then a return on sales will be recorded as a debit in the revenue contra account, Return on Sales or Sales Returns and Allowances.

If the asset account had a credit balance or the CA account had a debit balance, this would indicate an error in the journal entries. Consider what would happen if you have sales on credit that you reasonably expect will not be paid. In the example of Homes Inc. the percentage of customers defaulting on the account, and the amount defaulted, is estimable retail accounting and probable. Past experience with uncollected bad debt has been, on average, 10% of credit sales. The sale to the Johnson family will create a bad debt expense estimate of 10% of the amount receivable. Contra asset accounts can be used in a variety of areas, but there are three contra asset examples that you should pay close attention to.

Examples of contra asset account in the following topics:

Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements. Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. There are three contra asset accounts that commonly appear in an organization’s chart of accounts. It is paired with the trade accounts receivable account, and contains a reserve for receivables that are unlikely to be paid by customers. By combining the balances in these two accounts, one can determine the net amount of receivables that the reporting entity expects to receive.