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A Beginner’s Guide to Using Contra Asset Accounts

contra expenses

An example of a contra expense account is Purchase Returns and Allowances. An allowance for doubtful accounts is considered a “contra asset,” because it reduces the amount of an asset, in this case the accounts receivable. The allowance, sometimes called a bad debt reserve, represents management’s estimate of the amount of accounts receivable that will not be paid by customers. If actual experience differs, then management adjusts its estimation methodology to bring the reserve more into alignment with actual results. The allowance for doubtful accounts is a contra asset because it reduces the value of the accounts receivable account on the general ledger.

contra expenses

In the United States, the use of an expense account can be traced back to George Washington, who chose to forego a salary and relied on an expense account to cover his purchases during his military leadership in the American Revolution. Reimbursement of personal usage of university resources, such as a photocopier, by employees when the resources involved are typically not used to provide services on a fee-for-service basis. Such usage is normally not allowed, but may happen for insignificant and incidental items. In other words, contra revenue is a deduction from gross revenue, which results in net revenue.

Contra Liabilities Account Definition

The Committee shall consist of ten experts of high moral standing and recognized competence in the field of human rights, who shall serve in their personal capacity. The experts shall be elected by the States Parties, consideration being given to equitable geographical distribution and to the usefulness of the participation of some persons having legal experience. When a State, pursuant to this article, has taken a person into custody, contra expense account it shall immediately notify the States referred to in article 5, paragraph 1, of the fact that such person is in custody and of the circumstances which warrant his detention. The State which makes the preliminary inquiry contemplated in paragraph 2 of this article shall promptly report its findings to the said States and shall indicate whether it intends to exercise jurisdiction. Learn about how you can report a human rights violation.

What are examples of contra income?

Sales returns, sales allowance and sale discounts are different examples of contra revenue accounts. Contra accounts such as these have a debit balance and are deducted from the total amount of a company's revenue.

The reason for recognizing a contra liability is to reduce the corresponding account for amounts that cannot be realized or collected, while not adjusting the historical cost. The adjusting journal entry is done each month, and at the end of the year, when the insurance policy has no future economic benefits, the prepaid insurance balance would be 0. You’ll continue to use the contra asset account until the equipment has been completely depreciated, retired, or sold.

Common Reasons for Prepaid Expenses

You’ve just converted $20 worth of cash into $20 worth of shoes; an asset that remains in your inventory. Since you no longer have the shoes, aka the asset, you record a $20 expense on your income statement, But you also record $30 in revenue from the sale, so your net income is $10. Of course, you’ll also have to pay your employees’ wages, your rent, your utilities and other costs. Those are expenses, too, because, without them, you wouldn’t have had a store in which to sell the shoes and collect the revenue. 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.

Purchase Discounts, Returns and Allowances are contra expense accounts with a credit balance that reduce the normal debit balance of the main Purchase Expense account in order to present the net value of purchase expenses in a company’s income statement. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities include discount on notes or bonds payable. Contra liability accounts are not as popular as contra asset accounts.

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