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

A write-off journal entry removes an asset not in use and its related contra account from the balance sheet. Increases in value in excess of prior impairment loss is debited directly to the asset and credited to a revaluation reserve account in the equity section of the balance sheet. Increases in value in excess of prior impairment loss are debited directly to the asset and credited to a revaluation reserve account in the equity section of the balance sheet.

You’ll continue to use the contra asset account until the equipment has been completely depreciated, retired, or sold. Learn why contra accounts, when utilized correctly along with a paired account, contra expense account are a crucial component of accurate accounting and financial review. Under today’s tax laws of the United States, expense accounts are treated as either “accountable” or “unaccountable”.

Business Operations

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, etc. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. This depreciation is saved in a contra asset account called accumulated depreciation. The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment.

Revenue AccountRevenue accounts are those that report the business’s income and thus have credit balances. Revenue from sales, revenue from rental income, revenue from interest income, are it’s common examples. A contra account is an account with a balance opposite the normal accounts in its category.

Taxes Payable vs. Payroll Taxes

Inventory obsolescence is an expense account, while the allowance for obsolete inventory is a contra asset account, which aims to reduce the inventory valuation on your balance sheet. Contra accounts appear on the same financial statement as the related account. For example, an accounts receivable’s contra account is a contra asset account. This type of account can also be called the bad debt reserve or allowance for doubtful accounts. Goodwill’s value on the balance sheet is reported at net of accumulated impairment loss, a contra asset account; the current impairment loss is reported on the income statement.

For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. Asset accounts always maintain a debit balance, so anytime that you increase the value of an asset, such as when you deposit customer payments or invoice a customer, that asset account is debited or increased. Likewise, when you pay a bill, your cash account is reduced because you’re lowering the balance. A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger. 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.

What is a Contra Expense?

Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. 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.

The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. Balance sheet, users of financial statements can learn more about the assets of a company. For example, if a company just reported equipment at its net amount, users would not be able to observe the purchase price, the amount of depreciation attributed to that equipment, and the remaining useful life.

Definition and Examples of Contra Assets

Writing off your obsolete inventory in this manner allows you to expense the cost of the obsolete inventory while also decreasing your current inventory balance using the contra asset account. Contra asset accounts are used to track everything from depreciation expenses to returned merchandise. Learn what a contra asset is and how you can use these accounts in your small business.

• Sales allowance reduces the selling price when a customer agrees to accept a defective unit instead of returning it to the seller.
• Asset accounts always maintain a debit balance, so anytime that you increase the value of an asset, such as when you deposit customer payments or invoice a customer, that asset account is debited or increased.
• Contra expense accounts are rarely used, because organizations find it to be easier to record third-party payments directly against an expense account.
• If you offer credit terms to your customers, you probably know that not all of them will pay.
• Accumulated deprecation represents the cumulative amount of depreciation expense charged against an asset.

A regular asset account typically carries a debit balance, so a contra asset account carries a credit balance. Two common contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts represents the percentage of accounts receivable a company believes it cannot collect. Allowance for doubtful accounts offsets a company’s accounts receivable account. Accumulated depreciation offsets a company’s real property assets, such as buildings, equipment and machinery. Accumulated deprecation represents the cumulative amount of depreciation expense charged against an asset.

If you stock a limited amount of inventory, you could probably do without it. Nora O’Malley covers small business finance and entrepreneurship topics for The Balance. Along with her writing work, Nora is an entrepreneur and consultant who opened an all-tap wine bar in New York’s East Village dubbed Lois and owns a sophisticated snack food business Aida. For her businesses, Nora is responsible for finances, marketing, operations, and fundraising. Along with The Balance, her writing has appeared in Thrillist, Insidehook and Vinepair. Expense accounts are also privately regulated by internal auditors for many employers, often to ensure funds are handled appropriately.

Units should consider using an allowance for doubtful accounts when they are regularly providing goods or services “on credit” and have experience with the collectability of those accounts. The following entry should be done in accordance with your revenue and reporting cycles , but at a minimum, annually. Contra assets allow for more granular visibility on the balance sheet by maintaining historical costs and independent values rather than reducing the original account directly. When a company gives a discount to customers in an effort to convince them to buy its goods or services, it is recorded in the discount on sales account.