The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount. This makes sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms. Jackpotcow Casino: Premier Online Gaming destination offers exciting gaming experiences while understanding the importance of accurate financial reporting. Most accounts receivable would just be the time between purchase and credit card settlement. By understanding the nature and function of contra accounts, businesses can accurately reflect their financial position, providing transparency to stakeholders such as investors, creditors, and internal management. Contra asset accounts help companies record any reductions to their non-current and current assets.

Do Contra Accounts Have Debit or Credit Balances?

Fortunately, the seat vendor offered an early payment discount of 5%, meaning that when Show-Fleur paid off its full credit note within the first 30 days, it recouped $30 thousand in savings. Wanting to spruce up its aging inventory, Show-Fleur purchased new, climate controlled-seats for its fleet, delivering increased comfort for passengers and a cleaner, more modern look for vehicle interiors. The initial cost of this upgrade was $8 thousand per limo or $600,000 in total. A business called Show-Fleur offers private driving tours of local botanical gardens — all from the comfort of high-end limousines. For its day-to-day operations, the business maintains a fleet of 75 identical 2016 Ford Explorer limousines, each initially retailing at $150 thousand.

How Does a Contra Account Work in Accounting?

• Now, the car is worth less than $1,000 and you continue to put more money into upkeep, maintenance, and insurance for the car than the value of the vehicle.
• Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.
• Contra revenue accounts reduce revenue accounts and have a debit balance.
• In the realm of accounting, various techniques are used to ensure financial statements provide an accurate and comprehensive view of a company’s financial health.
• The company predicts which accounts receivable won’t be paid by customers and writes those off.

If you’re the one managing your company’s books of accounts, be sure to report the contra account on your financial statement on the line item directly beneath the main account. A contra account is an asset account that is kept at either a negative or zero balance and is used on a balance sheet to offset the positive balance of a paired asset. To put it another way, a contra account is an account listed within a general ledger with the purpose of capturing the reduced value of a paired or related account when the two are added together. A contra-asset account is an account that opposes the balances of other asset accounts. As mentioned, a company will usually have debit balances in its asset accounts. If a company has a history of recording or tracking bad debt, it can use the historical percentage of bad debt if it feels that historical measurement relates to its current debt.

How to Record a Contra Account

The bond is listed on the balance sheet at the full amount of $1,000, but the cash received is just $950, so a contra liability for the discount is listed to make the entry balance. Treasury stock represents shares of a company’s own stock that it has repurchased from shareholders but not retired. Instead of increasing assets or decreasing liabilities (as would be typical when spending cash), buying treasury stock reduces shareholders’ equity. Specifically, it is contra to shareholders’ equity because it decreases the total shareholders’ equity on the balance sheet. Similarly, allowance for receivables will pair with accounts receivable balances. Although contra-asset accounts have credit balances, they do not appear in liabilities or equity.

In finance, a contra liability account is one that is debited for the explicit purpose of offsetting a credit to another liability account. In other words, the contra liability account is used to adjust the book value of an asset or liability. Contra assets are still recorded along with other assets, though their natural balance is opposite of assets.

• Therefore, the book value of an asset in the books is equal to its historical cost (the debit balance of the asset) minus the related amount of contra asset in the balance sheet (the credit balance of the contra asset).
• This is done by using one of the estimation methods above to predict what proportion of accounts receivable will go uncollected.
• 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.
• The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline.

• The bond is listed on the balance sheet at the full amount of $1,000, but the cash received is just $950, so a contra liability for the discount is listed to make the entry balance.
• For this example, let’s say a company predicts it will incur $500,000 of uncollected accounts receivable.
• Master accounting topics that pose a particular challenge to finance professionals.
• All outstanding accounts receivable are grouped by age, and specific percentages are applied to each group.
• There can be hidden value in stocks that have a lot of fully depreciated buildings.
• For industries that rely on natural resources — mining, logging, oil, gas — depletion tracks the gradual exhaustion of the raw material in question, offsetting that loss in value against the initial appraisal of the land.
• Since it is a contra asset account, this allowance account must have a credit balance (which is contrary to the debit balances found in asset accounts).

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The Contra Liability Account

For this example, let’s say a company predicts it will incur $500,000 of uncollected accounts receivable. A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. 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.

• The allowance for doubtful accounts is a general ledger account that is used to estimate the amount of accounts receivable that will not be collected.
• The amount is reported on the balance sheet in the asset section immediately below accounts receivable.
• Some of the most common contra assets include accumulated depreciation, allowance for doubtful accounts, and reserve for obsolete inventory.
• That is to completely or partially offset the balance of their related asset accounts.

Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance. To offset this, the allowance for doubtful accounts balance is adjusted via a credit, while the bad debt account is debited to balance out the AR account. When combined, the AR account and the allowance for doubtful accounts contra assets offer a projection of how much net cash is expected to be received from outstanding accounts. Inventory obsolescence is an expense account, while the allowance for obsolete inventory is a contra asset account, which aims to reduce the inventory valuation on your balance sheet.

What is Accounts Receivable Collection Period? (Definition, Formula, and Example)