Therefore, these companies must maintain an obsolete inventory reserve account to net off any unusable stock from the account. This requirement also comes from the accounting standard for inventories. However, a contra-asset account usually has a credit or nil balance. This account offsets the balance in the respective asset account that they pair with on the balance sheet. A contra account is a general ledger account with a balance that is opposite of the normal balance for that account classification. The use of a contra account allows a company to report the original amount and also report a reduction so that the net amount will also be reported.
When a contra asset account is not stated separately in the balance sheet, it may be worthwhile to disclose the amount in the accompanying footnotes, where readers can readily see it. Reserve for obsolete inventory is a contra asset account used to write down the inventory account if inventory is considered obsolete. Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods. In this scenario, a write-down is recorded to the reserve for obsolete inventory. Accumulated depreciation is the most prevalent type of contra-asset account. It represents all the depreciation related to an asset or the company’s overall assets.
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Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount. For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. This type of account could be called the allowance for doubtful accounts or a bad debt reserve.
This improvement in the accounting details and transparency is good for any business in multiple ways. These accounts might also appear on the balance sheets of the company. ADAs are used to create allowances for clients that bought the company’s goods or services but somehow failed to pay the owed amount. Businesses Classified Balance Sheet Financial Accounting can also write off many expenses like these from the financial records even if the inventory has been phased out completely. Suppose a clothing business has sold $50,000 of inventory on credit. In other words, accumulated depreciation will be $10,000 each year until the car depreciates to $0 twenty years later.
Contra Revenue Accounts
The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. The amount is reported on the balance sheet in the asset section immediately below accounts receivable. Classified Balance Sheet Financial Accounting The net of these two figures is typically reported on a third line. Allowance for doubtful accounts (ADA) is a contra asset account used to create an allowance for customers who are not expected to pay the money owed for purchased goods or services.
Accounts Receivable is an asset account that represents the amount of money due to a business for goods or services that have been delivered or used but not yet paid for by customers. As mentioned, companies do not represent these accounts on the balance https://1investing.in/what-is-quickbooks-and-how-does-it-work/ sheet. However, they will still appear on the notes to the financial statements with necessary disclosures. On the other hand, accumulated depreciation is a contra-asset account. This account will offset the asset’s value by $10,000 each year.
What Is the Benefit of Using a Contra Account?
Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities includes discounts on notes or bonds payable. Contra liability accounts are not as popular as contra asset accounts. The company has a contra asset account for accumulated depreciation expense and a separate asset account for equipment cost.
