Business, Legal & Accounting Glossary
An account which offsets another account. A contra-asset account has a credit balance and offsets the debit balance of the corresponding asset. A contra-liability account has a debit balance and offsets the credit balance of the corresponding liability.
The account is an income account that is expected to hold a balance opposite to what is normally expected, to counteract the balance in another income account. Accumulated Depreciation, used to diminish the value of an asset over time, is another example of a contra-account.
GAAP requires that an allowance must be made for bad debts. An estimate must be made on some kind of percentage basis. Credit a contra-account “Allowance for Bad Debts” on the Balance Sheet. Debit Bad Debt Expense.
A contra-account is a balance sheet account whose purpose is to reduce the amount of another account. That is why asset contra-accounts have credit balances while liability contra-accounts have debit balances. “Contra” is a Latin word that means “against”.
Professional firms like Law Firms or even accounting firms may use an account called “Unbilled Accounts Receivable’. This is for work they’ve racked up but aren’t ready to bill the clients yet. The offset account is a liability account “Unearned Revenue”.
Asset account that offsets an associated account. For example, accumulated depreciation account that reduces the original cost of an asset to arrive at its book value. Also called contra asset or valuation allowance.
Here are some examples:
When Correct Account Balances May Not Be Normal Generally, an account balance that is not normal is incorrect, but there are exceptions. For example, if a company overdraws its bank account, the Cash account (normal debit balance) will have a temporary credit balance.
Similarly, if bills are overpaid, Accounts Payable (normal credit balance) may have a temporary debit balance. If a company is operating at a loss, Retained Earnings (credit balance) may have a debit balance. Eying the Trial Balance When reviewing the trial balance for errors, the first step is to eye the accounts to see that each account’s balance is in the proper debit or credit column.
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This glossary post was last updated: 18th April, 2020 | 37 Views.