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). The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable. Therefore, the net amount of the accounts receivable that is expected to turn to cash is $38,000. This account appears next to the current asset Accounts Receivable.
Because the allowance for doubtful accounts is established in the same accounting period as the original sale, an entity does not know for certain which exact receivables will be paid and which will default. Therefore, generally accepted accounting principles (GAAP) dictate that the allowance must still be established in the same accounting period as the sale but can be based on an anticipated and estimated figure. The allowance can accumulate across accounting periods and may be adjusted based on the balance in the account.
Is contra asset an asset?
Common examples of contra assets include: Accumulated depreciation. It is a contra-asset account – a negative asset account that offsets the balance in the asset account it is normally associated with. Allowance for doubtful accounts.
An account with a balance that is the opposite of the normal balance. For example, Accumulated Depreciation is a contra asset account, because its credit balance is contra to the debit balance for an asset account. This is an owner’s equity account and as such you would expect a credit balance. Other examples include the allowance for doubtful accounts, discount on bonds payable, sales returns and allowances, and sales discounts.
The net of these two figures is typically reported on a third line. Another contra asset listed on the balance sheet is accumulated depreciation.
The credit balance in Accumulated Depreciation means that the cost of the property, plant and equipment will continue to be reported. Looking at the cost of the plant assets and the credit balance in Accumulated Depreciation allows us to see how much of the plant assets’ cost has been depreciated and how much has not been depreciated. Allowance for doubtful accounts (ADA) is a contra asset account used to create an allowance for customers that do not pay the money owed for purchased goods or services. The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables. The sales method applies a flat percentage to the total dollar amount of sales for the period.
It covers money and other valuables belonging to an individual or to a business. Another example of a contra asset account is the accumulated depreciation account which reduces the reporting value of capital assets.
Allowance for Doubtful Accounts
An asset account which is expected to have a credit balance (which is contrary to the normal debit balance of an asset account). For example, the contra asset account Allowance for Doubtful Accounts is related to Accounts Receivable.
The account Allowance for Doubtful Account is credited when the account Bad Debts Expense is debited under the allowance method. The use of Allowance for Doubtful Accounts allows us to see in Accounts Receivable the total amount that the company has a right to collect from its credit customers.
Allowance for obsolete inventory or obsolete inventory reserve are also examples of contra asset accounts. Sales returns is a contra revenue account as the figure is a negative amount net against total sales revenue.
Free Financial Statements Cheat Sheet
Allowance for doubtful accounts is a common contra asset listed on a company’s balance sheet under accounts receivable. When a company sells its products or services to customers on credit, the company records the amount sold in its accounts receivable account.
What is an example of a contra asset?
A contra asset is a negative asset account that offsets the asset account with which it is paired. The purpose of a contra asset account is to store a reserve that reduces the balance in the paired account.
- For example, Accumulated Depreciation is a contra asset account, because its credit balance is contra to the debit balance for an asset account.
- This is an owner’s equity account and as such you would expect a credit balance.
- An account with a balance that is the opposite of the normal balance.
The credit balance in the account Allowance for Doubtful Accounts tells us how much of the debit balance in Accounts Receivable is unlikely to be collected. Accumulated depreciation is an asset account with a credit balance known as a long-term contra asset account that is reported on the balance sheet under the heading Property, Plant and Equipment.
The amount of a long-term asset’s cost that has been allocated, since the time that the asset was acquired. An allowance for doubtful accounts is a contra-asset account that nets against the total receivables presented on the balance sheet to reflect only the amounts expected to be paid. The allowance for doubtful accounts is only an estimate of the amount of accounts receivable which are expected to not be collectible. The actual payment behavior of customers may differ substantially from the estimate. Over time, the accumulated depreciation balance will continue to increase as more depreciation is added to it, until such time as it equals the original cost of the asset.
It would appear on the company’s income statement in the revenue section. Allowance for Doubtful Accounts is a contra current asset account associated with Accounts Receivable. When the credit balance of the Allowance for Doubtful Accounts is subtracted from the debit balance in Accounts Receivable the result is known as the net realizable value of the Accounts Receivable.
Simply stated, assets represent value of ownership that can be converted into cash (although cash itself is also considered an asset). The balance sheet of a firm records the monetary value of the assets owned by that firm.
Reasons to Show Contra Accounts on the Balance Sheet
Typically, a company fails to collect all of the money owed by customers making purchases on credit. The amount a company records as allowance for doubtful accounts is the amount from its accounts receivable the company considers uncollectible.
The contra asset account Accumulated Depreciation is related to a constructed asset(s), and the contra asset account Accumulated Depletion is related to natural resources. include buildings, machinery, office equipment, furniture, vehicles, etc. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets.
For example net sales is gross sales minus the sales returns, the sales allowances, and the sales discounts. The net realizable value of the accounts receivable is the accounts receivable minus the allowance for doubtful accounts. Contra accounts are reported on the same financial statement as the associated account.
This reduces the amount of the carrying value of a company’s fixed asset to account for the wear and tear over the asset’s useful life. Fixed assets are often listed on the balance sheet as property, plant and equipment. The accumulated depreciation account appears on the balance sheet as a credit and is a reduction from the total amount listed for fixed assets. Some companies choose not to include accumulated depreciation on the balance sheet and simply list the net amount of property, plant and equipment. To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts.
In financial accounting, an asset is any resource owned by the business. Anything tangible or intangible that can be owned or controlled to produce value and that is held by a company to produce positive economic value is an asset.
For example, a contra account to accounts receivable is a contra asset account. This type of account could be called the allowance for doubtful accounts or bad debt reserve. 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.
At that time, stop recording any depreciation expense, since the cost of the asset has now been reduced to zero. Accumulated Depreciation is associated with property, plant and equipment (plant assets). Accumulated Depreciation will be credited when Depreciation Expense is recorded.
For example, based on previous experience, a company may expect that 3% of net sales are not collectible. If the total net sales for the period is $100,000, the company establishes an allowance for doubtful accounts for $3,000 while simultaneously reporting $3,000 in bad debt expense. If the following accounting period results in net sales of $80,000, an additional $2,400 is reported in the allowance for doubtful accounts, and $2,400 is recorded in the second period in bad debt expense. The aggregate balance in the allowance for doubtful accounts after these two periods is $5,400.