Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period. In the realm of accounting, various techniques are used to ensure financial statements provide an accurate and comprehensive view of a company’s financial health. One such method is the use of contra accounts, a type of account that directly correlates and offsets a related account. Therefore, contra-asset accounts differ from other accounts that have a credit balance.
Financial Controller: Overview, Qualification, Role, and Responsibilities
A contra account provides missing context by pairing it with a related account. So as values shift depending on real-world factors, rather than making deductions or adjustments to the original or “parent” account, you would record these changes in the contra account instead. By viewing these accounts — the parent and contra — in tandem, business owners can gain broader insights, preserve the historical figures stored in the parent account, and make accommodations for any relevant changes. Overall, while maintaining contra accounts may require additional effort, the benefits they offer in terms of financial transparency and accountability make them an essential tool in accounting. Rather, it is an adjunct account or a valuation account that is added to the face value of the bonds to arrive at the carrying value (or book value) of the bonds on the balance sheet. contra accounts also help companies keep their general ledgers organized.
What are Contra Accounts?
In many different aspects of business, a rough estimation is that 80% of account receivable balances are made up of a small concentration (i.e. 20%) of vendors. Two primary methods exist for estimating the dollar amount of accounts receivables not expected to be collected. If you keep a lot of inventory in stock, chances are that some of the inventory will become obsolete.
Benefits of Contra Accounts
- This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms.
- These accounts also ensure that you follow the matching principle in accounting, which states that you record expenses in the same period you incur them.
- In other words, the contra liability account is used to adjust the book value of an asset or liability.
- As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find.
- But in the real world, converting all of that potential into hard cash is highly unlikely, if not impossible.
Therefore, for these three, the debit balance actually represents a negative amount. By reporting contra asset accounts on the 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. Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset. The most common contra type, contra assets, records the loss in value of any asset accounts listed in your general ledger. And by comparing these contras against their corresponding parent accounts, you can better understand the actual value of the assets retained by your business.
The Contra Revenue Account
However, it will also have a negative accumulated depreciation of $60,000, offsetting that cost. After each accounting period, the company records a depreciation expense of the asset. Allowance for receivables is an account that companies maintain to record possible bad debts. This account offsets the balance in the respective asset account that they pair with on the balance sheet. For example, if an account has a debit balance, a contra account will have a credit balance.
Adjusting the Allowance
- By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company.
- Typically, these notes reflect purchases made on credit by your customers.
- Accounting software can simplify the management of and reporting from your ledger.
- If the total net sales for the period is $100,000, the company establishes an allowance for doubtful accounts for $3,000 while simultaneously reporting $3,000 in bad debt expense.
- However, the fundamental principle is that the contra account is used to offset the related main account, providing a more nuanced view of the company’s financial position.
- Osman has a generalist industry focus on lower middle market growth equity and buyout transactions.
The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Offsetting the asset account with its respective contra asset account shows the net balance of that asset.
What are the Different Types of Contra Accounts?
- Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks.
- The company now has a better idea of which account receivables will be collected and which will be lost.
- In the above example, the debit to the contra liability account of $100 lets the company recognize that the bond was sold at a discount.
- For stakeholders, looking at both accounts is also crucial in their decision-making process.
- 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).