What is a contra inventory account? What is it used for? Homework Study com

Contra inventory account

The recipient of a loan, meaning the recipient of cash or other assets from a lender which must be repaid in the future, usually with interest. Bonds for which the actual amount of dollars received at the time of issuance is more than or less than the principal amount of the bonds. Bonds are typically issued at a premium or discount when actual market interest rates have decreased or increased, respectively, since the establishment of the stated interest rate in the bond indenture. A term used to describe payables recorded in conjunction with the recording of accrued expenses. As with most procurement and accounting processes, inventory adjustments are greatly simplified when supported by the use of a comprehensive procurement solution with an inventory management module. With all your data in one convenient, cloud-based location, and total visibility into not just your transactional data, but inventory, supply chain management, and more, you can take a more active role in inventory management. Cost of goods sold is recorded on the 2010 profit and loss statement as $43,200.

Contra inventory account

Corporations are a popular form of business ownership not only because they offer limited liability to owners, but also because they facilitate access to capital through the issuance of stock to potentially large numbers of investors. In addition, the corporate form facilitates changes in ownership through the trading of stock in secondary markets. A disadvantage of the corporate form is the federal and, in some cases, state taxation of corporate profits. Those same profits are taxed a second time if and when they are distributed to stockholders as a dividend. There are ways to avoid this “double” taxation, but it requires planning and compliance with specific provisions of the tax law. An alternative form of business ownership is a proprietorship or partnership.

Senior bonds

When bonds are purchased, the investor becomes an owner of debt, or, in effect, a lender with rights to receive future payments of principal and interest. Most financial analysts work for investment banking companies, stock brokerage firms, banks and other financial institutions involved in providing debt or equity financing to businesses or advice to investors. Analysts will often times measure the operating performance not by net income but rather by EBITDA.

Contra Account Definition – Investopedia

Contra Account Definition.

Posted: Sat, 25 Mar 2017 19:32:23 GMT [source]

This calculation can become substantially more complicated with the existence of preferred stock, stock options and other factors covered in more advanced accounting courses. A company’s earnings per share is usually different from the amount of its dividends per share due to the fact that companies can and often do choose to retain all or a portion of their earnings for use in the business. A company’s EPS is a critical in financial statement analysis and stock valuation. In fact, a company’s EPS and financial analysts’ projections of future EPS are probably the most significant Contra inventory account factors impacting a stock’s current fair market value. The allocation of capitalized costs of property, plant and/or equipment to expense over the asset’s useful life using the straight-line, units-of-production or some other method of depreciation. Depreciation incurred in a merchandising business is reflected as a selling and administrative expense of the company. Depreciation of property, plant and equipment used in support of a manufacturing company’s production processes are accounted for as manufacturing overhead costs and recorded as an expense through cost of goods sold.

List of Contra 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. The cost incurred in the current period for employees’ gross wages, which includes amounts withheld from those wages for payment to government or other entities on the employees’ behalf. Wage expense differs from salaries expense in that wages are paid to employees who are paid on an hourly rate, as opposed to some fixed monthly amount or salary. Wage expense incurred as a product cost would be included in direct or indirect labor costs and recorded as an expense through cost of goods sold. Accounts that maintain cumulative running balances and are reflected on a company’s balance sheet. These accounts include all asset, contra-asset, liability, capital contribution and retained earnings/deficits accounts.

Still, it is important when possible to consider how the net accounts are calculated and be wary of companies that are reporting a ton of bad debts. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. Now, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. Contra equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock. Small businesses using the double-entry accounting method should get well acquainted with the contra account. This type of account helps balance your accounting records to accurately portray expenses that come up through the course of business.

Selling and administrative expense budget

Compliance with the matching principle will often require a company to make adjusting entries to properly account for any accrued or prepaid expenses before preparation of the company’s financial statements. All assets reported on a company’s balance sheet are classified as either current or long-term assets. Current assets include cash and any other asset expected to be used up or converted https://accounting-services.net/ to cash within the next year. Current assets typically include any short-term investments in securities, accounts receivable, inventory, supplies and prepaid expenses. Even assets like property, plant and equipment may on occasion be included as current assets if management intends to sell the assets for cash in the next year and there is evidence that such a sale will actually take place.

  • The two primary causes of a change in retained earnings/deficit are net income/losses and any dividends for the period.
  • If contra assets appear in the credit column, record contra liabilities on side.
  • Because profits are defined as increasing net assets of a company from successful operations, dividends are simply distributions of some or all of those assets and are typically paid to owners in the form of cash.
  • In the case of merchandise returns, the providing of “credit on account” means that the account receivable from a credit customer returning the merchandise is reduced by the sales price of the returned goods through a credit entry.
  • Companies with higher fixed costs and lower variable costs have higher operating leverage, which results in greater potential profits and increased risk of loss with any changes in volume.

Two common contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts represents the percentage of accounts receivable a company believes it cannot collect. Allowance for doubtful accounts offsets a company’s accounts receivable account. Accumulated depreciation offsets a company’s real property assets, such as buildings, equipment and machinery. Accumulated deprecation represents the cumulative amount of depreciation expense charged against an asset. Sometimes referred to as “net book value of an asset. ” An asset’s book value is the amount that appears in the balance sheet of the company that owns it.

Why Use a Contra Account?

This reflects the fact that a company’s assets can be financed in only two ways, through either debt or equity. The amount of owners’ equity can also be characterized as the amount of residual claims the owners have on the assets of the company following the claims of creditors.

The resulting inventory turnover reflects the number of times the company buys and then sells its entire average balance of inventory during a period of time. Inventory is a critical asset for most companies and needs to be well-managed. Having sufficient inventory to satisfy customer demand and promote sales is crucial. Having excessive inventory can, on the other hand, be expensive due to costs of space, maintenance, possible obsolescence and financing. Generally speaking, the higher a company’s inventory turnover the better as long as customers are satisfied with product selection and availability. Higher turnover results from lower inventory levels relative to sales volume.

The best of all methods used to distinguish fixed and variable components of mixed costs. It uses all of the data reflected in the scattergraph and applies an objective statistical approach to determine the one straight-line that best fits, given all of the graph’s plotted points. An organizational unit over which the assigned manager has accountability for the allocation and use of assets as well as revenue and costs. Raw materials or supplies which are not incorporated directly into a manufactured product but are used to support or maintain the manufacturing process in some way. In an arm’s-length transaction, an asset’s cost is also its fair market value at the date of acquisition. Under GAAP, the book value of an asset is based on its historical cost even if the asset has appreciated in value subsequent to its acquisition. On the other hand, decreasing asset values below book values may require asset write-downs.

  • Companies that are able to quickly convert inventory into larger amounts of cash through profitable sales may operate effectively at ratios of less than 1 to 1.
  • The investing activities for the period are reported on the companies Statement of Cash Flows.
  • This is referred to as an “accrued expense” and is recorded in December with an accompanying liability for utilities payable.
  • In many cases, partial principal payments are required during the term of a note or loan.
  • Most businesses accept credit cards but simply hike-up prices to cover the processing costs.
  • Asset appreciation is not recorded under GAAP until an actual sale of the asset takes place, at which time a gain on sale of the asset would be recorded.

The contra account to the accounts receivable account is the allowance for doubtful accounts and is used to represent the amount of invoiced goods or services that the business does not expect to collect. Combining the value of the allowance for doubtful account and the accounts receivable balance gives a company the net amount of cash it can expect to receive from goods it has sold or services it has already provided. Accumulated Depreciation contra account contains the cumulative sum total of all the depreciation expenses that have been charged against those fixed assets over time.


This is referred to as an “accrued revenue” and is recorded in conjunction with the recording of an account receivable. In some cases, cash or other assets are received from customers in advance of the period in which goods are sold or services are actually rendered. Any such cash advance or deposit received from a customer prior to product delivery or the actual rendering of services should be accounted for as a liability to reflect the future obligation to deliver products or perform services. These liabilities are typically referred to as “unearned revenues.” Revenues are not really revenues until they are earned.

Contra inventory account

Leave a Reply

Your email address will not be published.