For example, the allowance for doubtful accounts indicates money owed from customers a company does not expect to receive. There can be multiple reasons why the company does not expect to receive this owed money. Most financial disclosures dictate the amount expected to be lost, how the company came up with the figure, and What is a Contra Asset Account any financial impact this lost capital will have on the business. A separate disclosure paragraph is often necessary for each contra account. This is another reason allowance for doubtful accounts is referred to as a contra asset account. The contra account’s credit balance keeps it from violating the cost principle.
What is a contra asset account examples?
Examples of Contra Accounts
Another example of a contra asset account is the accumulated depreciation account which reduces the reporting value of capital assets. Allowance for obsolete inventory or obsolete inventory reserve are also examples of contra asset accounts.
The interest expense would not be reversed since it is an actual expense recorded for the period. Designed for freelancers and small business owners, Debitoor invoicing software makes it quick and easy to issue professional invoices and manage your business finances. Our priority at The Blueprint is helping businesses find the best solutions to improve their bottom lines and make owners smarter, happier, and richer. That’s why our editorial opinions and reviews are ours alone and aren’t inspired, endorsed, or sponsored by an advertiser. Editorial content from The Blueprint is separate from The Motley Fool editorial content and is created by a different analyst team. If you’re running a business, chances are that you’ve come across some unexpected costs. Now we’ve launched The Blueprint, where we’re applying that same rigor and critical thinking to the world of business and software.
For example net sales is gross sales minus the sales returns, the sales allowances, and the sales discounts. The net realizable value of the accounts receivable is the accounts receivable minus the allowance for doubtful accounts. On the balance sheet you would list the asset at $20,000 then show the $4,000 in accumulated depreciation being subtracted from it for a net value of $16,000. Accumulated depreciation is a contra account because it subtracts from the asset. Allowance for doubtful accounts is a contra account because it subtracts from the asset accounts receivable. Another example of a what are retained earnings is the accumulated depreciation account which reduces the reporting value of capital assets.
The tricky part is that the machine doesn’t really decrease in value – until it’s sold. Since we are discussing doubtful accounts, the offset will be against accounts receivables. They are useful in preserving the historical value in the main account while presenting a write-down or decrease in a separate contra account that nets to the current book value. Contra accounts serve an invaluable function in financial reporting that enhances transparency in accounting books. 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.
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Is Prepaid Expense A Contra Asset?
The interest owed on a security deposit would show as a debit in the expense account until the tenant moved and the account settled. at that time, cash is debited and the expense account credited for the interest owed/paid. A classic example of human error creating a credit balance on in an asset account is bouncing a check. If you write a check for more than is in your bank account you are going to going to go from a debit balance to a credit balance. You could do that by miscalculating how much money is in your account or putting money into or taking money out of the wrong bank account by accident. Allowance for doubtful accounts offsets a company’s accounts receivable account.