How many contra accounts are there

This account may also appear on an organization's balance sheet, and the allowance for doubtful accounts may result in a reduction in the number of receivables. Trade accounts receivable refer to an amount that a company bills to its clients when delivering goods or services. These billings may usually be documented on invoices, which are then summarized in an aging report for all the business's accounts receivable.

Discount on notes receivable refers to a contra asset account that occurs when the current value of a note receivable amounts to less than the face value of the note. The resulting credit balances in these types of accounts may typically be amortized as interest revenue over the course of the note's viable lifetime.

Read more: Analytical Skills: Definitions and Examples. Even though a contra asset account shows negative or zero balances in credits within the account, it can still be advantageous for businesses to show any contra asset accounts they currently have within their balance sheets.

The following are several key reasons why it can be important to include contra asset accounts on a balance sheet. Related: 6 Essential Accounting Skills. The following examples help to illustrate how a business might highlight and calculate the balance within two of the most common types of contra asset accounts, an accumulated depreciation account and an allowance for doubtful accounts. Power Manufacturers, Inc. This method uses the initial purchase value and subtracts the accumulated depreciation value for the time period to result in the total value of the equipment after its use.

On the balance sheet over six years, Power Manufacturers, Inc's accumulated depreciation would increase every year to reduce the value of the equipment it purchased. It may look something like this:. Now let us say that Power Manufacturers, Inc.

On the balance sheet, the allowance for doubtful accounts can reduce the totals in the business's accounts receivable. Furthermore, the company might use the percentage found in the allowance for doubtful accounts to calculate the total value of its receivables, even though they have not yet collected payment on credit sales:. If you're proficient in contra asset account types, then explore the following career opportunities in the finance industry:. Loan officer.

Find jobs. Company reviews. Find salaries. These accounts can be listed based on the respective asset, liability, or equity account to reduce their original balance. An asset that is recorded as a credit balance is used to decrease the balance of an asset. The balance of a contra asset account Contra Asset Account A contra asset account is an asset account with a credit balance related to one of the assets with a debit balance.

When we add the balances of these two assets, we will get the net book value or carrying value of the assets having a debit balance. This account decreases the value of a hard asset. This account is not classified as an asset since it does not represent a long term value.

It is not classified as a liability since it does not constitute a future obligation. A liability that is recorded as a debit balance is used to decrease the balance of a liability. The balance of a contra liability account is a debit balance. This account decreases the value of the liability. It is not classified as a liability since it does not represent a future obligation.

Equity that is recorded as a debit balance is used to decrease the balance of a standard equity account. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company.

The contra equity account reduces the total number of outstanding shares Outstanding Shares Outstanding shares are the stocks available with the company's shareholders at a given point of time after excluding the shares that the entity had repurchased. A contra account is a general ledger account with a balance that is the opposite of another, related account that it is paired with.

Contra accounts are shown in the financial statements below the paired accounts, although sometimes the balances of the two accounts are merged to a net amount for presentation purposes. 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. Contra accounts appear on the same financial statement as the related account.

This type of account can also be called the bad debt reserve or allowance for doubtful accounts. The balance in the allowance for doubtful accounts is used to find out the dollar value of the current accounts receivable balance that is deemed uncollectible.

The balance sheet shows the amount in the asset section underneath the accounts receivable. The net value of both these figures is usually reported on a third line. The use of contra accounts ensures the accuracy of financial accounting records, as the value of the original accounts is not directly reduced.

In the event that a contra account is not utilized, it can become increasingly troublesome to determine historical costs , which makes tax preparation time-consuming and difficult. When the original dollar amount is kept in the original account and a separate account is used for recording the deduction, the resulting financial information becomes more transparent and helpful for stakeholders. The first time a contra asset account is recorded in a journal entry , it is to be deducted from the expense.

For example, when the credit amount in allowance for doubtful accounts increases, it is also recorded in the bad debt expense as a debit increase. There are two major methods of recording a contra account. The allowance method of accounting enables a company to determine the amount reasonable to be recorded in the contra account. The percentage of sales method assumes that a fixed percentage of goods or services sold by a company cannot be received. The contra asset account carries a credit balance because an asset account usually has a debit balance.

Such accounts are allowance for doubtful accounts and the accumulated depreciation account. A company creates allowances for doubtful accounts to record the portion of accounts receivable which it believes it will no longer be able to collect.