Debit BalanceIn a General Ledger, when the total credit entries are less than the total number of debit entries, it refers to a debit balance. A debit balance is a net amount often calculated as debit minus credit in the General Ledger after recording every transaction. Contra assets allow for more granular visibility on the balance sheet by maintaining https://www.thenina.com/retail-accounting-as-a-way-to-enhance-inventory-management/ historical costs and independent values rather than reducing the original account directly. Contra assets are credit accounts that carry their own values that when combined with the value of the paired account, informs the balance sheet. The difference between an asset’s account balance and the contra account balance is known as the book value.
In this scenario, a write-down is recorded to the reserve for obsolete inventory. A contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit balance. The account offsets the balance in the respective asset account that it is paired with on the balance sheet. In response, the firm should decrease its accounts receivable and revenue balances. That is done by crediting accounts receivable by $100 and debiting the contra revenue account sales returns and allowances for $100.
What is the importance of Contra Asset Accounts?
Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. Contra liability accounts are less commonly used than contra asset accounts. Contra liability accounts are mainly used by corporations that issue bonds frequently. That is because some of the bonds are issued at a discount, so this reduces the balance of their bonds payable.
If a ledger were to be observed in this situation, then one would see a balance of three asset debits matched up against three contra asset credits . However, some asset accounts need a negative counterpart to reduce the balance of that account. The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset.
The balance sheet would show the piece of equipment at its historical cost, then subtract the accumulated depreciation to reflect the accurate value of the asset. When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt construction bookkeeping expense. Balance sheet, users of financial statements can learn more about the assets of a company. 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.
These include accumulated depreciation, accumulated amortization, allowance for receivables, obsolete inventory, and discount on notes receivables. Although contra asset accounts have credit balances, they do not appear in liabilities or equity. Usually, credit balances include items from one of those two natures. Therefore, contra asset accounts differ from other accounts that have a credit balance. Expense accounts are technically contra equity accounts because they are linked to another equity account, revenue, and maintain an opposite balance.
Presentation of Contra Assets
So, an organization looking for a robust accounting process must move to this reporting for better understanding. Are prepared for various parties; some of them might not be accounting versed; they help identify the reduction in total value. It is only prudent to show the reduction or reserve in a separate account, and at any point, it gives us the netbook value explaining what the actual cost was and how much of that has been depreciated.