In accounting lingo, a dual entry account system includes the concept of a contra entry. It’s an entry that’s the offset or reverse of an entry that’s on the other side of the account. An entry will be recorded on the credit side if and when a debit entry is recorded in an account and vice-versa.
Usually, companies add to the accumulated depreciation account after every accounting period. Similarly, allowance for receivables will pair with accounts receivable balances. These balances cannot offset asset accounts that do not relate to them. Every contra asset account on a company’s accounting records will also have a pairing account.
How to Record a Contra Account
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Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. Both these aspects of the transaction are although entered in the same account, are mentioned in separate columns. The $10,000 of depreciation will reduce the book value of the car. Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock.
How Contra Asset Accounts Work
The matching principle states that revenue and expenses must be recorded in the same period in which they occur. Therefore, the allowance is created mainly so the expense can be recorded in the same period revenue is earned. Some companies may classify different types of debt or different types of vendors using risk classifications. For example, a start-up customer may be considered a high risk, while an established, long-tenured customer may be a low risk.
Hence, the book value of the liability will be the credit balance of the liability account minus the debit balance of its contra liability counterpart. Both the asset and the corresponding contra asset accounts must be stated clearly in the balance sheet. Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset’s net value or book value. In the books, the account of the asset would have a debit value of $100,000, and the contra asset account would have a credit value of $30,000. If the asset account had a credit balance or the contra asset account had a debit balance, this would indicate an error in the journal entries. Note that in accounting, the term “book value” is also used interchangeably with net value.
Allowance for Doubtful Accounts
In essence, contra-asset accounts have a negative balance while other asset accounts have a positive balance. Both of these accounts offset each other to represent a net balance on a company’s balance sheet. Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, https://personal-accounting.org/accounting-for-law-firms-a-guide-including-best/ i.e. the “final” revenue figure listed on the income statement. A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity). This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000.
The second entry will be accumulated depreciation, which will be in credit. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. 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 amount. As mentioned, companies do not represent these accounts on the balance sheet.