Contra Accounts

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.

Allow users to ascertain:
Accounts receivable →Allowance for doubtful debts(ADD)
  * level of doubtful debts (and changes therein), collection policies and problems

Property, plant and equipment → Accumulated depreciation
  * likely ages of assets and future cash outflows for purchases of new assets

Intangibles → Accumulated amortization
  * likely life of intangible

Inventory→Provision for obsolescence.
  * levels of slow-moving, out-of-date stock, efficiency of stock management.

Accumulated Depreciation (Amortisation)

Contra accounts are used to accumulate depreciation on fixed assets , such as buildings and equipment.

The debit is an expense account in the income statement. The credit is a contra asset account. The credit side of the journal entry could have been to the asset account ‘Building’. Instead the contra account is used, so that by leaving the asset cost account alone, the balance sheet presents the acquisition cost of the asset along with the accumulated amount of expense that has been recognised to date. Showing both these items allows users to make a rough guess as to how long the asset has been in...