What type of account is allowance for doubtful accounts A expense account B liability account C contra asset account D asset account?

What are Contra Accounts?

A contra account offsets the balance in another, related account with which it is paired. Contra accounts appear in the financial statements directly below their paired accounts. Sometimes the balances in the two accounts are merged for presentation purposes, so that only a net amount is presented. If the related account is an asset account, then a contra asset account is used to offset it with a credit balance. If the related account is a liability account, then a contra liability account is used to offset it with a debit balance. Thus, the natural balance of a contra account is always the opposite of the account with which it is paired.

The Contra Asset Account

The most common contra account is the accumulated depreciation account, which offsets the fixed asset account. The fixed asset account contains the original acquisition cost of a number of fixed assets, while the contra account (accumulated depreciation) contains the sum total of all the depreciation expense that has been charged against those assets over time. Taken together, the asset account and contra asset account reveal the net amount of fixed assets still remaining. A contra asset account is not classified as an asset, since it does not represent long-term value, nor is it classified as a liability, since it does not represent a future obligation.

The Contra Liability Account

The contra liability account is less common than the contra asset account. An example of a contra liability account is the bond discount account, which offsets the bond payable account. The two accounts together yield the carrying value of the bond. A contra liability account is not classified as a liability, since it does not represent a future obligation.

The Contra Equity Account

Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock.

The Contra Revenue Account

Contra revenue is a deduction from gross revenue, which results in net revenue. Contra revenue transactions are recorded in one or more contra revenue accounts, which usually have a debit balance (as opposed to the credit balance in the typical revenue account). There are three commonly used contra revenue accounts, which are:

Sales returns. Contains either an allowance for returned goods, or the actual amount of revenue deduction attributable to returned goods.
Sales allowances. Contains either an allowance for reductions in the price of a product that has minor defects, or the actual amount of the allowance attributable to specific sales.
Sales discounts. Contains the amount of sales discount given to customers, which is usually a discount given in exchange for early payments by customers.

Examples of Contra Accounts

Here are several examples of contra accounts, as they would be presented in the balance sheet:

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6 Types of Contra Asset Accounts and What They Mean

By Indeed Editorial Team

Updated July 23, 2021 | Published February 4, 2020

Updated July 23, 2021

Published February 4, 2020

When a company evaluates its financial position, a financial analyst might calculate the total amounts that the company stores in its asset accounts. While financial information on these accounts might include receivables collected, the company can also choose to include its contra asset accounts as a separate line item on the balance sheet.

Similarly, the company may choose to combine the amounts in both its contra and fixed asset accounts if the contra asset account has a relatively low balance.

In this article, you will learn what a contra asset account is, the types of contra asset accounts a business may have as well as an example of how common types of contra asset account balances are calculated.

What is a contra asset account?

A contra asset account is a type of asset account where the account balance may either be a negative or zero balance. This type of asset account is referred to as "contra" because normal asset accounts might include a debit, or positive, balance, and contra asset accounts can include a credit, or negative, balance. Because of the oppositional nature of these asset accounts, the contra account acts as a 'contrary' element to the debit balances of regular asset accounts. Furthermore, a contra asset account may also be regarded as a negative asset account because equalizing an asset account and contra asset account results in the asset's net, or total, balance.

This type of account can equalize balances in the asset account that it is paired with on a business's balance sheet. The contra asset account has credited balances that can reduce the balance in its paired asset account. A company can choose to state this information as separate line items on its balance sheet so that any financial planners or analysts can determine the extent to which a paired asset might be reduced.

Read more: Your Guide to Careers in Finance

Types of contra asset accounts

A company might use a combination of different types of asset accounts, and the following six types of contra asset accounts can be used in conjunction with these fixed and current asset accounts.

Accumulated depreciation
Accumulated depletion
Obsolete inventory reserves
Allowance for doubtful accounts
Trade accounts receivable
Discount on notes receivable

1. Accumulated depreciation

An accumulated depreciation account is a type of contra asset account that is used for recording the amount of depreciation a fixed asset evolves through. For instance, a fixed asset such as machinery, a company building, office equipment, vehicles or even office furniture would be highlighted in an accumulated depreciation account. This amount may appear on a company's balance sheet, and it can ultimately result in a reduction in the gross amount of a business's fixed assets.

2. Accumulated depletion

Accumulated depletion is another common type of contra asset account that allows a company to see the number of depletion expenses that it has accrued over time concerning the use of company equipment, tools or other business resources necessary for processes and operations. This amount is typically paired with the company's current assets on the balance sheet.

3. Obsolete inventory reserves

Obsolete inventory refers to a company's products or goods that have become obsolete, or unusable, during routine use and operations. This type of contra asset account may generally be debited expenses, followed by a credit to the company's contra asset account for recording unusable inventory. Similarly, a business may also write off these types of expenses from its financial records if the inventory has been completely phased out. The contra asset account can also be combined with a current inventory account, allowing a financial analyst to determine the current market value of the company's inventory.

4. Allowance for doubtful accounts

Allowance for doubtful accounts, or ADA for short, is a type of contra asset account that is used to create an allowance for clients that purchase goods or services, and then fail to pay the amount owed for their purchases. This account may also appear on an organization's balance sheet, and the allowance for doubtful accounts may result in a reduction in the number of receivables.

5. Trade accounts receivable

Trade accounts receivable refer to an amount that a company bills to its clients when delivering goods or services. These billings may usually be documented on invoices, which are then summarized in an aging report for all the business's accounts receivable.

6. Discount on notes receivable

Discount on notes receivable refers to a contra asset account that occurs when the current value of a note receivable amounts to less than the face value of the note. The resulting credit balances in these types of accounts may typically be amortized as interest revenue over the course of the note's viable lifetime.

Read more: Analytical Skills: Definitions and Examples

Reasons to include contra asset accounts on a balance sheet

Even though a contra asset account shows negative or zero balances in credits within the account, it can still be advantageous for businesses to show any contra asset accounts they currently have within their balance sheets. The following are several key reasons why it can be important to include contra asset accounts on a balance sheet.

Financial advisors and planners can see the accumulation of assets an organization has
The amount of depreciation on an asset can be calculated using information from the balance sheet
The contra asset account plus normal asset accounts can show the purchase price and market value of a business's current assets
Contra asset accounts may also show the remaining value or remaining useful life of an asset

Related: 6 Essential Accounting Skills

Examples

The following examples help to illustrate how a business might highlight and calculate the balance within two of the most common types of contra asset accounts, an accumulated depreciation account and an allowance for doubtful accounts.

Example accumulated depreciation

Power Manufacturers, Inc. purchases new machinery for a total of $300,000. The company projects that the equipment will be usable for six years, and it subtracts a 16% yearly depreciation rate from the initial value to calculate the amount of depreciation over the next six years. Therefore, the depreciation of the equipment increases by approximately $50,000 for each year of use. This method uses the initial purchase value and subtracts the accumulated depreciation value for the time period to result in the total value of the equipment after its use.

On the balance sheet over six years, Power Manufacturers, Inc's accumulated depreciation would increase every year to reduce the value of the equipment it purchased. It may look something like this:

At the end of the first year, the net value of the equipment would be $300,000 - $50,000 in accumulated depreciation, so the net value of the equipment at the end of the first year would amount to $250,000.
At the end of the second year, it would be calculated as $300,000 - $100,000, resulting in a net value of $200,000.
At the end of the third year the net value would be $300,000 - $150,000 = $150,000.
At the end of year four, net value of the equipment would be $300,000 - $200,000 = $100,000.
At the end of the fifth year, the net value would amount to $300,000 - $250,000 = $50,000.
And by year six, the net value would amount to 0.

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Allowance for doubtful accounts

Now let us say that Power Manufacturers, Inc. reports its total credit sales for the quarter at $100,000, and it additionally estimates that 5% of all the credit sales made in the past quarter will default on payment. On the balance sheet, the allowance for doubtful accounts can reduce the totals in the business's accounts receivable. So, if the company reported receivables amounting to $100,000, the estimated 5% default rate would reduce the number of accounts receivable by $5,000.

Furthermore, the company might use the percentage found in the allowance for doubtful accounts to calculate the total value of its receivables, even though they have not yet collected payment on credit sales:

$100,000 - $5,000 (the 5% allowance for doubtful accounts) to equal a net receivable amount of $95,000.

So, the company's total value of receivables results in $95,000, and Power Manufacturers may then adjust this calculation in their financial records as they receive more credit sales.

Types of finance and accounting jobs

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What type of account is allowance for doubtful accounts?

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.

Is allowance for doubtful accounts an expense account?

Allowance for doubtful accounts on the balance sheet If the doubtful debt turns into a bad debt, record it as an expense on your income statement.

Is doubtful accounts an asset or liability?

Doubtful accounts are an asset. The amount is reflected on a company's balance sheet as “Allowance For Doubtful Accounts”, in the assets section, directly below the “Accounts Receivable” line item. Doubtful accounts are considered to be a contra account, meaning an account that reflects a zero or credit balance.

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.

Allowance method