What type of account is the allowance for doubtful accounts contra asset account asset account liability account expense account?
A Contra Account carries a balance (i.e. debit or credit) that offsets the normal account, thereby reducing the paired account’s value. In This Article
Table of Contents
Contra Account DefinitionA contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity). The normal balances and impact on the carrying value are as follows:
By contrast, contra accounts have the following balances and impact on an account’s carrying value:
A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. For example, accumulated depreciation is a contra-asset that reduces the value of a company’s fixed assets, resulting in net assets. On a company’s financial statements, the two items – the contra account and paired account – are often presented on a “net” basis:
Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet. Example Contra Account – Allowance for Doubtful AccountsFor instance, under U.S. GAAP, the allowance for doubtful accounts represents management’s estimate of the percentage of “uncollectible” accounts receivable (i.e. the credit purchases from customers that are not expected to be paid). The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline. Hence, the “Accounts Receivable, net” line item on the balance sheet adjusts for the allowance to display a more realistic value of A/R and the cash payments to be received, so investors are not misled or caught off guard by sudden decreases in a company’s A/R. Contra Asset Journal Entry AccountingSuppose a company has recorded $100,000 in accounts receivable (A/R) and $10,000 in the allowance for doubtful accounts (i.e. 10% of A/R is estimated as uncollectible).
Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a credit We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R). On the balance sheet, the “Accounts Receivable, net” balance would be $90,000.
Types of Contra AccountsContra Asset, Contra Liability & Contra EquityThere are three distinct contra-accounts, as shown in the table below.
Contra Account ExamplesThe most common examples of contra-accounts are the following:
Contra Revenue AccountAnother type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement. Contra revenue generally carries a debit balance, rather than the credit balance seen in normal revenue. The most common contra revenue accounts are the following:
Step-by-Step Online Course Everything You Need To Master Financial ModelingEnroll in The Premium Package: Learn Financial Statement Modeling, DCF, M&A, LBO and Comps. The same training program used at top investment banks. Enroll Today What type of account is allowance for doubtful account?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.
What type of account is allowance for doubtful accounts A expense account B liability account C contra asset account D asset account?Answer: a.
Allowance for Doubtful Accounts is a contra-asset account.
What type of account is allowance for doubtful accounts quizlet?What type of account is the Allowance for Doubtful Accounts? Allowance for Doubtful Accounts is a contra asset account.
What is the type of account and normal balance of allowance for doubtful accounts a contra asset debit?Answer and Explanation:
Explanation: Allowance for Doubtful Accounts is a contra asset account that has a normal credit balance. It has the opposite balance of a normal asset account due to the fact that it decreases total assets.
|