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Put simply, contra accounts are used to reduce the normal accounts on the balance sheet. If the related account has a debit as the natural balance, then the contra account will record a credit. By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount. Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset. The accumulated depreciation account is perhaps the most common contra asset account used by business owners. Contra asset accounts also provide a clear picture of the companies’ accumulation of assets.
These contra revenue accounts tend to have a debit balance and are used to calculate net sales. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. If you offer credit terms to your customers, you probably know that not all of them will pay. Creating this LLC Accounting: Everything You Need to Know account builds in a safeguard against overstating your accounts receivable balance. 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.
Allowance for doubtful debts accounts
A contra account is a general ledger account with a balance that is the opposite of another, related account that it is paired with. A contra-account is a permanent account presented in the balance sheet. For example, if an organization purchases equipment for $100,000 and expects to use it for 10 years on a uniform basis, then it would not expense the entire $100,000 in the year of purchase. An organization would rather record $100,000 as an asset and would amortize $10,000 depreciation each year for the next 10 years.
Overall, contra accounts are offsetting balances that are the opposite of specific accounts. There are several examples of contra accounts, including accumulated depreciation, accumulated depletion, accumulated amortization, allowance for receivables, etc. These are all examples of contra asset accounts, which are the prevalent type of contra accounts. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value.
What you’ll learn:
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 https://adprun.net/bookkeeping-accounting-for-lawyers/ serve an invaluable function in financial reporting that enhances transparency in accounting books. A contra account is an account with a balance opposite the normal accounts in its category.
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