Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values. To settle the charges, BlackRock agreed to pay a $2.5 million penalty. By a miracle, it turns out the company ended up being rewarded a portion of their outstanding receivable balance they’d written off as part of the bankruptcy proceedings.
- This requirement also comes from the accounting standard for inventories.
- You’ll notice the allowance account has a natural credit balance and will increase when credited.
- For example, a start-up customer may be considered a high risk, while an established, long-tenured customer may be a low risk.
- A contra asset account example is an accumulated depreciation account that will help the company track and offset fixed assets.
However, the “Allowance for Doubtful Accounts” (or “Allowance for Uncollectible Accounts”) is a contra account related to the concept of bad debts. This contra-asset account reduces the accounts receivable balance on the balance sheet to its net realizable value. The Allowance for Doubtful Accounts carries a credit balance that reduces the total amount of accounts receivable to show the amount that the company expects to collect. A contra asset account is an asset account with a natural credit balance.
The Contra Asset Account
Companies technically don’t need to have an allowance for doubtful account. If it does not issue credit sales, requires collateral, or only uses the highest credit customers, the company may not need to estimate uncollectability. Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers.
Sometimes, the current value of a note receivable will fall compared to its face value. This process will give rise to a contra asset account which is the discount on notes receivables. Although contra-asset accounts have credit balances, they do not appear in liabilities or equity. Usually, credit balances include items from one of those two natures. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean.
However, it will also have a negative accumulated depreciation of $60,000, offsetting that cost. Allowance for receivables is an account that companies maintain to record possible bad debts. However, this account does not represent actual irrecoverable debts. However, a contra-asset account usually has a credit or nil balance.
- Note that in accounting, the term “book value” is also used interchangeably with net value.
- A contra account offsets the balance in another, related account with which it is paired.
- Ultimately, an accumulated depreciation contra asset account helps the company reduce the gross amount of all the fixed assets within a company.
- Similarly, these accounts can also be essential in various calculations.
- Whether reported as separate lines on the financial report or as a cumulative value, the net amount of the pair of accounts is called the “net book value” of the individual asset.
Contra accounts are a significant part of a company’s financial statements. These accounts can significantly reduce balances on the balance sheet. You’ll continue to use the contra asset account until the equipment has been completely depreciated, retired, or sold. The company now has a better idea of which account receivables will be collected and which will be lost. For example, say the company now thinks that a total of $600,000 of receivables will be lost.
Free Financial Statements Cheat Sheet
This type of account is a contra asset that reduces the amount of the gross accounts receivable account. As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find. Companies bury them in the footnotes and often don’t break out the actual calculation.
Therefore, the asset’s net value (or the book value) will be $70,000. This type of reporting allows anyone analyzing the balance sheet to understand much more about the company and its assets than if they were to simply look at the net value of the depreciated asset. By reflecting both accounts on the balance sheet, analysts can understand both the original price and the total decrease in value of a certain asset over time. Management may disclose its method of estimating the allowance for doubtful accounts in its notes to the financial statements. Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock. Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a credit
balance.
What is a Contra Asset?
Of the $50,000 balance that was written off, the company is notified that they will receive $35,000. The money left over after a company supports operations can be a snapshot of its financial health. Home Depot also devotes footnote 4 to its share repurchase program and reports that the company is authorized by its board to repurchase $20 billion in shares.
Accumulated depreciation is the total of all depreciation that has been charged to existing fixed assets such as equipment and buildings. There can be hidden value in stocks that have a business financial ratio analysis calculator lot of fully depreciated buildings. Companies like to depreciate assets as quickly as possible to get the tax savings, so the balance sheet may not state the true value of fixed assets.
Contra revenue account
There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra liabilities reduce liability accounts and carry a debit balance. Contra equity accounts carry a debit balance and reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance. A contra account offsets the balance in another, related account with which it is paired.
Is Treasury Stock a Contra Account?
Still, it is important when possible to consider how the net accounts are calculated and be wary of companies that are reporting a ton of bad debts. Revenue is an income statement account, but it flows through to the equity section of retained earnings as well. Any products that are sold at a discount or returns are deducted from gross revenue to produce net revenue as the top line on the income statement. Regardless of that, allowance for receivables accounts will exist for all companies that have account receivable balances.
The accumulated depreciation account plays a vital role in representing the accurate value of an asset in the financial statements. 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.
Specifically, it is contra to shareholders’ equity because it decreases the total shareholders’ equity on the balance sheet. Contra asset accounts provide business owners with the true value of certain asset accounts. For example, let’s say your accounts receivable balance is currently $11,500, but you’re not entirely sure that you’ll be able to collect the entire balance due. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean.
Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value. The balance sheet will show a gross fixed assets value, a contra account value for accumulated depreciation, and a net value. All three values can be useful for investors depending on what they’re looking for.