Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. 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. Get instant access to video lessons taught by experienced investment bankers.

• However, this account does not represent actual irrecoverable debts.
• The contra asset account pulls the value of the combined accounts down, which in turn decreases the value of the second account as well, which is a normal account.
• When the account receivable is written off, it is added to bad debt expense on the income statement and placed in the contra account.
• Investopedia notes that the difference between the asset’s contra account balance and its account balance is called the book value.
• Contra equity accounts are accounts in the equity section of the balance sheet that reduce the amount of equity a company holds.

Contra equity accounts carry a debit balance and reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance. An account with a balance that is the opposite of the normal balance.

Allowance for doubtful accounts

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. The difference between an asset’s account balance and the contra account balance is known as the book value.

The proper size of a contra asset account can be the subject of considerable discussion between a company controller and the company’s auditors. The auditors want to ensure that reserves are adequate, while the controller is more inclined to keep reserves low in order to increase the reported profit level. A contra account is an account with a balance opposite the normal accounts in its category.

Contra Account Definition, Types, and Example

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. Regardless of that, allowance for receivables accounts will exist for all companies that have account receivable balances. This account helps companies present a more accurate accounts receivable balance on the financial statements. Similarly, allowance for receivables will pair with accounts receivable balances.

Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. The $10,000 of depreciation will reduce the book value of the car. This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders. Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values. The allowance for these doubtful accounts can ultimately result in the total number of receivables.

What are the Benefits of Factoring Your Account Receivable?

The natural balance of a contra asset account, in this case, is exactly the opposite of the balance of the related account. A less common example of a contra asset account is Discount on Notes Receivable. The credit balance in this account is amortized or allocated https://accounting-services.net/how-to-do-bookkeeping-for-startup/ to Interest Income or Interest Revenue over the life of a note receivable. 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.

This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000. A customer returned $100 worth of items, claiming them to be defective. A contra asset account is an account in the balance sheet that offsets the balance of a regular asset account.

Contra liabilities

Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks. 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 Bookkeeping for Nonprofits: Best Practices, Tips, Resources, FAQs 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.

As mentioned, a company will usually have debit balances in its asset accounts. However, the details for contra accounts usually exist on the notes to the financial statements. However, these can cause a reduction in other balances on the statement.

Contra Asset Account

In this scenario, a write-down is recorded to the reserve for obsolete inventory. 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. Contra liabilities are common in companies that sell bonds to raise capital.