Inventory Write-Off: Definition as Journal Entry and Example

Far less common is the obsolete inventory reserve, which reduces the overall inventory value on the balance sheet. This contra account holds a reserve, similar to the allowance for doubtful accounts. For each debit against the inventory account, there will be a corresponding credit against the obsolete inventory contra account.

If the LIFO reserve account balance goes up or down, additional costs are then added on to the costs of the goods the company has sold throughout the year. This information is integral for investors because it enables them to see how inflation affects how to find the best business accountant for your small business the value of the company’s inventory, or it allows them to determine the taxation benefits of using the LIFO or FIFO accounting methods. As a reminder, assets and expenses are debit accounts whereas liabilities and revenues are credit accounts.

Examples of Contra Accounts

A contra account is an asset account that is kept at either a negative or zero balance and is used on a balance sheet to offset the positive balance of a paired asset. To put it another way, a contra account is an account listed within a general ledger with the purpose of capturing the reduced value of a paired or related account when the two are added together. Allowance for doubtful accounts (ADA) is a contra asset account used to create an allowance for customers who are not expected to pay the money owed for purchased goods or services. The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables. For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets. However, that $1.4 billion is used to reduce the balance of gross accounts receivable.

• Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance.
• So when this journal reduces both accounts, it will not impact the total amount.
• Discount on Bonds Payable is a contra liability account with a debit balance that reduces the normal credit balance of its parent Bonds Payable liability account in order to present the net value of payables on a company’s balance sheet.

The actual amount of uncollectible receivable is written off as an expense from Allowance for doubtful accounts. Transactions made to contra accounts are presented on a company’s financial statements under the related account. Contra accounts are important because they allow a company to follow the matching principle by recording an expense initially in the contra asset account. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet.

Contra liability account example

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contra inventory account definition

If you keep a lot of inventory in stock, chances are that some of the inventory will become obsolete. This frequently happens to manufacturing companies that sell products with an expiration date since any inventory remaining in stock past the expiration date quickly becomes obsolete. TechShop performs an inventory review and identifies that a portion of its inventory, worth $10,000, is likely to become obsolete due to new product releases and changing customer preferences. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs. Master accounting topics that pose a particular challenge to finance professionals.

What is a LIFO Reserve?

Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount. At the end of each accounting cycle, adjusting entries are made to charge uncollectible receivable as expense.

A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. Taking the example of CCC again, the company has $50,000 in accounts receivable at year-end of December 31. It’s important to note that retained earnings are an accumulating balance within shareholder’s equity on the balance sheet. In other words, contra revenue is a deduction from gross revenue, which results in net revenue.

How Does a Contra Account Work in Accounting?

Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming. Anytime you need to depreciate an asset, you’ll use an accumulated depreciation contra asset account, which records the amount of depreciation that has been expensed while offsetting the value of the asset being depreciated.