Contra Asset Examples, How a Contra Asset Account Works

Contra inventory account

This is due to the fact that par values on preferred stock are used as the basis for determining the amount of the stock’s dividend preferences. Preferred stock issued without a provision for the carryover of unpaid dividend preferences. This means preferred stockholders receiving less than the full amount of their dividend preference in any year have no ongoing rights to that deficiency in future years. In other words, unpaid dividend rights are lost forever under non-cumulative preferred stock. Most companies issue cumulative as opposed to non-cumulative stock when and if preferred stock is issued because investors typically demand cumulative rights in their preferred stock investments.

Foreclosure is an example of forced liquidation of assets to satisfy company debts. Probable future obligations to pay assets or provide services to another entity. Liabilities are also referred to as a company’s debts and are the result of a company’s debt financing. Partnerships do not generally provide such legal protections unless they are formed and operated as LLPs according to state law. LLPs are treated as partnerships for income tax purposes and are therefore exempt from the separate income taxation faced by most corporations.

Contra Revenue Account

When companies choose to make or manufacture a fixed asset for their own future use. All of the costs incurred in the construction or manufacturing process should be capitalized as part that asset. Also referred to as the “price earnings multiple,” the “P/E multiple,” or simply as the “multiple” at which a company’s stock is selling. A company’s P/E ratio measures the relationship of the company’s current common stock price to its earnings by dividing the current fair market value of a share of common stock by the most recent earnings per share . The resulting ratio serves as an index of how expensively a company’s stock is priced relative to its current earnings. In most cases, stocks with high P/E ratios reflect investor optimism about a company’s future earnings. Many risk-oriented investors choose to invest in stocks with high P/E multiples because they like the excitement of owning a growing company with sometimes-volatile stock prices.

Contra inventory account

In this case, the issuer could pay off the bonds by issuing new bonds at a lower interest rate, and the old bondholders would suddenly have cash in a lower interest rate market. As a result of this disadvantage to bondholders, companies issuing callable bonds will typically be forced to pay higher rates of interest than would otherwise be required without such a provision. CVP analysis may also be performed graphically through the plotting of total sales revenues and total costs at different levels of volume. The accounting records used to record, summarize and report a company’s financial transactions through financial statements. A company’s books generally refer to its journals, ledgers and financial statements. A group of individuals elected by the stockholders of a corporation to represent their best interests in providing overall direction to the company and in the making of major strategic decisions. The board is also responsible for the hiring and overseeing of senior management personnel and the declaration of dividends to stockholders in the event the company has available retained earnings.

What is an example of a contra account?

For example, a contra account can help you factor in a sales discount or a customer who won’t pay what’s owed. Any cost that varies in total over a period of time with changes in a company’s volume of production or sales. For example, if a manufacturing company’s direct material costs amount to $5 per unit produced, then the total amount of the company’s direct material costs for any period will vary based on that period’s volume of production. Production of 100 units and 200 units in consecutive periods would result in direct material costs of $500 and then $1,000, respectively. Clearly, direct material costs in this case vary in total with changes in volume. Perfectly variable costs increase in total by the same amount with each additional unit of sales or production ($5 in this case) and amount to zero if there is no production or sales.

Contra inventory account

A ratio used in financial statement analysis to measure the average number of days a company’s inventory is on hand before its sale. This ratio is sometimes referred to as the “average inventory holding period” and is calculated by dividing 365 days by the company’s inventory turnover. Comparisons of this ratio among similar companies in the same industry may help in evaluating a company’s performance in inventory management. Excessive inventories produce higher days sales in inventory and negatively impact a company’s profits through higher financing, storage and handling costs. Good managers seek to reduce inventory levels as much as possible without compromising customer sales.

Clients and results

If inventories are reduced to the point that customers become dissatisfied with product selection and availability, the lost profits on lower sales volume may more than offset any savings achieved from lower levels of inventory. A ratio used in financial statement analysis to evaluate a company’s liquidity. The ratio is calculated by dividing the amount of a company’s total current assets by its amount of total current liabilities.

  • Acceptance of a customer VISA card on a sale does not make it a credit sale.
  • A sub-category leading to net income or loss on a multi-step formatted income statement.
  • Under GAAP, this amount typically reflects the historical cost incurred in the asset’s acquisition, plus any costs incurred to get the asset ready for its original intended use and any subsequent costs of asset improvements.
  • Previously purchased products that are returned to the original supplier or vendor.
  • Along with The Balance, her writing has appeared in Thrillist, Insidehook and Vinepair.
  • Unsecured loans typically refer to loans for which no collateral is provided.

This inconsistency in application is due to the attitude of conservatism that prevails in accounting rules and standards. A company’s written or electronic record of all journal entries not otherwise recorded in a special journal. Special journals are often used to record a company’s recurring transactions, and as a result, the general journal is often used exclusively for adjusting and closing entries. Stands for generally accepted auditing standards, which detail the audit procedures and guidelines prescribed by the AICPA for the performance Contra inventory account of a CPAs certified audit of a company’s financial statements. Review and analyze financial statements – ratios and other calculations and comparisons of numbers that are found in the financial statements. An adjusting journal entry made as a result of changes in currency exchange rates affecting the valuation of a company’s investment in foreign subsidiaries. Employers are required to withhold and submit a designated amount of the employees wages each pay period to cover the employees Federal personal income tax liability.


For example, a bond with a principal amount of $1,000 may be sold for only $950. The bond is listed on the balance sheet at the full amount of $1,000, but the cash received is just $950, so a contra liability for the discount is listed to make the entry balance. Similarly, the company may choose to combine the amounts in both its contra and fixed asset accounts if the contra asset account has a relatively low balance.

What is contra journal entry?

A contra entry is recorded when the debit and credit affect the same parent account and resulting in a net zero effect to the account. These are transactions that are recorded between cash and bank accounts.

These costs are applied to specific jobs in WIP inventory based on a predetermined overhead rate. The manufacturing overhead account is really a temporary “holding” account that effectively stores overhead costs until they can be transferred to WIP. Because of the imprecision of predetermined overhead rates, it is quite rare for the amount of applied costs to equal the actual overhead costs incurred in any period. As a result, the manufacturing overhead account will usually have a nominal debit or credit balance at the end of any accounting period. This balance reflects an under- or over-application of costs that should be corrected through an adjusting entry. This adjustment should leave the manufacturing overhead account with a zero balance and correct the under- or over-application to WIP.

This is due to the fact that book values are generally based on historical costs, and in many cases, assets actually increase in value over time. In addition, assets are worth more when they are organized and managed in a way that generates a profit. It is rare to find a profitable company for sale at a price less than its book value. Under the rules of double-entry accounting, debit entries always record increases in asset, expense and dividend accounts while credit entries always record increases in liability, owners’ equity and revenue accounts. Double-entry accounting also requires that equal debit and credit totals be recorded with each and every company transaction. A written or electronic record maintained for each of a company’s assets,liabilities and categories of owner’s equity, including revenues, expenses and dividends. Accounts are used to summarize the affects of a company’s transactions on each of its assets, liabilities and categories of owners’ equity.

This actually refers to a credit entry the bank makes to a liability account maintained in the bank’s books reflecting the amount the bank owes the depositor as a result of the deposit. The bank’s credit of a depositor account does not refer to the recording of an increase in the cash account maintained in the depositor’s books, it means an increase in the liability on the bank’s books. A company’s receipt and deposit of cash is recorded in the company’s books with a debit entry to cash, regardless of the bank’s use of the term “credit.”

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