The main reason is to make the remaining shares more valuable, as their prices are expected to rise after the stock buyback. This means it received $4,500 in cash but needs to pay $5,000 back to the bondholders. Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at Scale Venture Partners, focused on technology. He’s currently a VP at KCK Group, the private equity arm of a middle eastern family office. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions. By a miracle, it turns out the company ended up being rewarded a portion of their outstanding receivable balance they’d written off as part of the bankruptcy proceedings.
Differences between Accounts Payable and Accounts Receivable
Of the $50,000 balance that was written off, the company is notified that they will receive $35,000. Contra accounts are confusing at first, but, with a little study, understanding them becomes second nature. Let’s go over how they work and what the main types are, and then finish with an example. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer.
Balance Sheet in Accounting: What You Need to Know
The allowance for doubtful accounts estimates the percentage of accounts receivable that are expected to be uncollectible. However, the actual payment behavior of customers may differ substantially from the estimate. The revenue contra accounts Sales Returns, Discounts and Allowances are subtracted from the main Sales Revenue account to present the contra expense account net balance on a company’s income statement. Allowance for uncollectible accounts, or allowance for doubtful accounts, is one of the most common contra current asset accounts. The dollar balance in the allowance for uncollectible accounts is the amount you don’t expect to collect, and this offsets the amount you report in accounts receivable.
Is a Contra Account a Debit or Credit?
In finance, a contra liability account is one that is debited for the explicit purpose of offsetting a credit to another liability account. In other words, the contra liability account is used to adjust the book value of an asset or liability. An example of a contra liability account is the bond discount account, which offsets the bond payable account.
What Is a Contra Liability Account
In its general ledger, the business will want to capture its gross sales figures and the actual value of the discount. In order to keep the accounts receivables as clean as possible with their historical values, we will use this contra account called allowance for doubtful accounts. The accumulated depreciation will ultimately reduce the value of fixed assets when the two accounts are netted with each other.
Note that in accounting, the term “book value” is also used interchangeably with net value. Therefore, the book value of an asset in the books is equal to its historical cost (the debit balance of the asset) minus the related amount of contra asset in the balance sheet (the credit balance of the contra asset). If you offer credit terms to your customers, you probably know that not all of them will pay. Creating this contra asset account builds in a safeguard against overstating your accounts receivable balance. If the bond is sold at a discount, the company will record the cash received from the bond sale as «cash», and will offset the discount in the contra liability account. Yes, allowance accounts that offset gross receivables are reported under the current asset section of the balance sheet.
For example, a start-up customer may be considered a high risk, while an established, long-tenured customer may be a low risk. In this example, the company often assigns a percentage to each classification of debt. Then, it aggregates all receivables in each grouping, calculates each group by the percentage, and records an allowance equal to the aggregate of all products. Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers.
Contra liabilities
- Also, note that when writing off the specific account, no income statement accounts are used.
- A company creates allowances for doubtful accounts to record the portion of accounts receivable which it believes it will no longer be able to collect.
- Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at Scale Venture Partners, focused on technology.
- If you receive an invoice from a supplier or vendor, it goes to accounts payable because you owe money for goods or services received.
- Contra asset accounts can be used in a variety of areas, but there are three contra asset examples that you should pay close attention to.
- For example, a company has $70,000 of accounts receivable less than 30 days outstanding and $30,000 of accounts receivable more than 30 days outstanding.
- In other words, the contra liability account is used to adjust the book value of an asset or liability.
