Contra Entry

Definition

A contra entry is an accounting entry that is used to offset or reduce the balance of another account. It is typically used to record the allowance for doubtful accounts, which is a contra asset account that reduces the balance of the accounts receivable account on the balance sheet.

5 Must Know Facts For Your Next Test

1. The allowance for doubtful accounts is a contra asset account that is used to estimate the amount of accounts receivable that are not expected to be collected.
2. The balance in the allowance for doubtful accounts is subtracted from the accounts receivable balance on the balance sheet to arrive at the net realizable value of the accounts receivable.
3. The balance in the allowance for doubtful accounts is increased by recording a bad debt expense, which is a debit to the bad debt expense account and a credit to the allowance for doubtful accounts.
4. When an account receivable is determined to be uncollectible, it is written off by debiting the allowance for doubtful accounts and crediting the accounts receivable account.
5. The balance in the allowance for doubtful accounts is reviewed and adjusted at the end of each reporting period to ensure that it accurately reflects the estimated amount of uncollectible accounts receivable.

Review Questions

• Explain the purpose of a contra entry in the context of accounting for uncollectible accounts.
  • A contra entry, such as the allowance for doubtful accounts, is used to offset or reduce the balance of the accounts receivable account on the balance sheet. This allows the company to report the net realizable value of the accounts receivable, which is the amount that is expected to be collected. The allowance for doubtful accounts is increased by recording a bad debt expense, and when an account is determined to be uncollectible, it is written off by debiting the allowance account and crediting the accounts receivable account.
• Describe the relationship between the allowance for doubtful accounts and the accounts receivable account.
  • The allowance for doubtful accounts is a contra asset account that is used to estimate the amount of accounts receivable that are not expected to be collected. The balance in the allowance for doubtful accounts is subtracted from the accounts receivable balance on the balance sheet to arrive at the net realizable value of the accounts receivable. This relationship allows the company to report the accounts receivable at their expected realizable value, rather than the full gross amount owed by customers.
• Analyze the impact of adjusting the allowance for doubtful accounts on the financial statements.
  • Adjusting the allowance for doubtful accounts can have a significant impact on the financial statements. Increasing the allowance will result in a higher bad debt expense, which will decrease net income on the income statement. Additionally, the higher allowance will reduce the net realizable value of the accounts receivable on the balance sheet. Conversely, decreasing the allowance will have the opposite effect, increasing net income and the reported value of accounts receivable. The balance in the allowance must be carefully evaluated and adjusted to accurately reflect the expected collectability of the accounts receivable.

Related terms

Allowance for Doubtful Accounts:

A contra asset account that is used to estimate the amount of accounts receivable that are not expected to be collected.

Accounts Receivable:

An asset account that represents the amount owed to a company by its customers for goods or services provided on credit.

Bad Debt Expense:

An expense account that is used to record the amount of accounts receivable that are written off as uncollectible.