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Contra Accounts Essay

1513 words - 7 pages

Contra Accounts 

Financial statements are required to present appropriate asset valuations and profit measurement. Some assets accounts decrease in value
* where property, plant and equipment are being used over time
* where there is a risk that business may not collect all debts owing to it

Contra accounts are negative asset accounts that are used to recongise expenses and related value changes without changing amount in control account. ( asset cost account balances because their costs are not changing, but rather their economic values are being used) Their purpose is to provide useful info to users of financial statements and to assist in internal control functions.

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Remember that accumulated depreciation on the balance sheet is the amount of depreciation accumulated over the life of the asset to date, whereas the amount of depreciation charged this year (to match the revenues the asset consumption is presumed to have helped generate) can be determined from the depreciation expense account in the income statement.
Depreciation is the allocation of the cost of a non-current asset (e.g. plant) to expense over the life of the asset to recognise the consumption of the asset’s economic benefits.

Accumulated depreciation is a contra-account that keeps a record of the depreciation recorded during the life of the non-current asset. The account balance for accumulated depreciation is deducted from the account for asset’s cost to arrive at asset’s net book value otherwise known as the carrying amount of the non-current asset. In recording depreciation, the asset becomes an expense through use. Similarly, the asset of prepaid insurance becomes an expense as the asset is used up. In contrast, inventory is an asset that usually becomes an expense through sale (ie. cost of sales).
e.g. The truck cost $50 000 and an annual depreciation expense of $8000 was determined. Each year, the depreciation expense account would be increased by $8000 and the contra asset account (called ‘accumulated depreciation’) would be increased by $8000.
On the balance sheet, the asset account for the truck's cost would continue to show a balance of $50 000, but each year the accumulated depreciation contra asset account would increase by $8000. Deducting accumulated depreciation from the long-term asset account leaves a figure known as the net book value

When non-physical assets, such as  goodwill , patents and trademarks, are amortised, the accumulated amortisation account is used instead of accumulated depreciation.

Accounts receivable and contra accounts

Accounts receivable
* Current asset
* Arise from sale of goods and/or services on credit.
* Dr Accounts receivable $xxx
* Cr Sales revenue $xxx
* To record sale of inventory on credit
Also known as debtors, trade debtors, trade receivables.

Sale on credit
* Benefits
* Earn more revenue if willing to sell to customers who wish to buy on credit
* Costs
* Additional record keeping
* Risk of not being paid
* Time value of money ̶delaying cash inflow and lending to customers “interest free”
Sale on credit – Risk of not being paid
* Customers may not pay off their accounts
* Bad Debts–part of customer’s debts to the company not collected i.e. An Expense to the company (Bad Debts Expense)
* Matching principle
* Recognising bad debts expense at the...

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