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A contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability. When an entry is made to the depreciation expense account, the offsetting credit is to the accumulated depreciation account, which is a contra asset account that offsets the fixed assets (asset) account. The balance in the depreciation expense account increases over the course of an entity’s fiscal year, and is then flushed out and set to zero as part of the year-end closing process. The account is then used again to store depreciation charges in the next fiscal year. A contra account is used to offset the debit of a regular asset account. Contra accounts will be linked to the main debit account and shown together on a balance sheet.
This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms. Most accounts receivable would just be the time between purchase and credit card settlement. If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative. On the other hand, if you’re looking at whats a contra account a high-flying growth stock that reports new revenue growth records each quarter but has a massive allowance for doubtful accounts, there may be problems ahead. The global Dental Contra Angle market complete profile of the companies is mentioned. Finally, the report contains the conclusion part where the opinions of the industrial experts are included.
Contra liability account example
And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand. Upgrading to a paid membership gives you access to our extensive collection https://personal-accounting.org/the-audit-process-8211-tufts-audit-and-management/ of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs. Take your learning and productivity to the next level with our Premium Templates.
Consider a business that offers an early payment discount to its customers, cutting their invoiced total by 3% if they pay within 1 week of invoicing. If every single buyer had taken advantage of the early payment discount, the company would have provided roughly $10 thousand in discounts during that same timeframe. In reality, the actual number of company discounts came closer to $5 thousand.
Definition Of a Contra Account?
Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset. To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts. 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.
- The account offsets the balance in the respective asset account that it is paired with on the balance sheet.
- A contra account balances the numbers from two or more accounts that are compared on the balance sheet.
- Now, if that sounded like a lot of mumbo-jumbo jargon to you, don’t worry.
- 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.
- A contra account is an account that records events like adjustments and transactions that are having an opposite effect on a relating account’s true value on the firm’s financial statements.
When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. GAAP, the allowance for doubtful accounts represents management’s estimate of the percentage of “uncollectible” accounts receivable (i.e. the credit purchases from customers that are not expected to be paid). An example where accumulated depreciation account of plant and machinery is a contra a/c account linked to company’s plant and machinery. The December 5th journal entries record the original sale, and the December 12th entries record the return and exchange.