Allowance for Doubtful Accounts and Bad Debt Expenses Cornell University Division of Financial Affairs

In addition to sales returns, the most common contra revenues are sales discounts and sales allowances. A “discount,” in accounting terms, usually refers to a price reduction offered as an inducement to customers who pay their bills quickly, not to a “sale” price, which is simply incorporated into gross revenue. Sales allowances are price reductions offered to persuade customers to accept merchandise with damage or minor defects not serious enough to warrant a return. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. A contra expense is an account in the general ledger that is paired with and offsets a specific expense account. The account is typically used when a company initially pays for an expense item, and is then reimbursed by a third party for some or all of this initial outlay. For example, a company pays for medical insurance on behalf of its employees, which it records in an employee benefits expense account.

• A transaction is evidenced by more than one binding arrangement.The binding arrangements should be combined for purposes of identifying the categorization unit of account.
• You don’t have to, yet even a small business will benefit by using the contra asset account for accounts receivable.
• The Board tentatively decided to rely on the identification of recognition attributes to determine the applicability of an inflow or an outflow to a reporting period.
• Balance sheet readers cannot only see the actual cost of the item; they can also see how much of the asset was written off as well as estimate the remaining useful life and value of the asset.
• Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life to account for declines in value over time.
• The first contra liability listed is an original issue discount , a feature of debt financing wherein the issuance price is less than the redemption price.

To record this payment to Music Suppliers, Inc., Music World makes a compound journal entry that decreases accounts payable for $900, decreases cash for $882, contra expenses and increases purchases discounts for $18. There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue.

Understanding a Contra Account

Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset. Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, https://www.bookstime.com/ etc. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. When a contra asset account is first recorded in a journal entry, the offset is to an expense.

The contra asset account Accumulated Depreciation is deducted from the related Capital Assets to present the net balance on the parent account in a company’s balance sheet. A contra expense account is a ledger account that is used to offset specific expense accounts such as accumulated depreciation account, purchase… Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming. Next, the Board discussed the role of collectibility in categorization of transactions. The Board then discussed circumstances in which a government has binding arrangements with similar characteristics and tentatively decided that a government can opt to apply a portfolio approach for categorization purposes. The Board also discussed circumstances in which multiple binding arrangements give rise to a single transaction and tentatively decided that such binding arrangements should be combined for purposes of identifying the categorization unit of account.

How are Contra Accounts Used and Reported?

For Category B expense transactions, the characteristic used to determine the applicability to a reporting period is the satisfaction of time requirements. The recognition attributes used to determine the applicability to a reporting period should be limited to be applied to transactions in the scope of this project with a prohibition for analogy. Topics related to required supplementary information, supplementary information, and notes to financial statements. This account serves two purposes — tracking total depreciation expenses while providing you with the accurate book value of the asset being depreciated. If you’re using accounting software, you’ll be able to create contra accounts when setting up your chart of accounts. I’ve audited notes to financial statements, and I’ve consulted with partners at the largest auditing firm in the world on notes to the financial statements. As a principle IMHO it is wrong because most readers of financial statements (i.e., investors and creditors) never hear of, nor really care about EITF 01-14.