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A contra account is an account found in an account ledger that is used to reduce the value of a related account.
A contra account's natural balance is opposite of the associated account. If a debit is recorded in a related account, the contra account record also records a credit.
For example, a contra account associated with accounts receivable is referred to as a contra asset account and is reported on the balance sheet. Numerous contra accounts are used within the financial statements. One of the most common contra accounts is the allowance for uncollectible accounts, a contra account to accounts receivable.
The balance in the allowance for uncollectable accounts represents the dollar amount expected to go uncollected and reduces the amount reported in accounts receivable. Another example of a contra account is accumulated depreciation accounts that reduce the reporting value of capital assets. Finally, sales returns is a contra revenue account as the figure is a negative amount net against total sales revenue.
Accountants use contra accounts rather than reduce the value of the non-contra account directly to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical costswhich can make tax preparation more difficult and time-consuming.
By keeping the original dollar amount intact and reducing the figure in a separate account, the financial information is also more transparent for financial reporting purposes. When accounting for assets, the difference between the asset's account balance and the contra account balance is referred to as the book value. The allowance method of accounting allows a company to here what to place in the contra account, while the percent of sales method assumes that How To Write A Liability Statement company cannot collect payment for a fixed percentage of goods or services that it has sold.
Both methods result in an adjustment of the original account dollar value to book value.
An account found in an account ledger that is used to reduce that value of a related account. Welcome to cocktail24.info! We are a trustworthy academic writing assistance agency with many years of experience in this field. We hire expert writers who possess. Fox Point Programs is an insurance agency fully licensed in all 50 states that specializes in professional and management liability insurance. The Professional Liability Defense Federation™ is a not-for-profit organization designed to bring together attorneys, claims professionals and risk management.
A contra account is presented on the financial statements as a negative figure on a line item directly underneath the main account. For example, a line item on the balance sheet reports the dollar value of accounts receivable. A line directly underneath this line reports allowance for uncollectable accounts.
The net of these two figures is typically reported on a third source. Dictionary Term Of The Day.
The net amount of cash and cash-equivalents moving into and out of a business.
Balance Sheet Explained
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