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Contra Assets

Business Accounting Bookkeeping The Ultimate Accounting Refresher Course The Accounting Equation - The Basis of Double Entry Bookkeeping
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Transcript

What we're going to talk about now is some other kinds of assets, which are called contract assets. And if you recall what contra assets are, they're actually negative asset accounts. And what that means is they actually reduce the book value of an asset to its book value, but you keep it separate from where the costs actually hit yes, inside. Now I'll explain that as we go through these transactions. So they kind of act a bit similar to liabilities to some extent, but they always sit on the asset side. So one example is, let's say we take up the depreciation on the equipment that we purchased previously.

So is cash being affected? In this case, there is no cash impact, so nothing will affect cash. What is the nature of this transaction? Well, we're actually taking up depreciation. So, when you think depreciation, you sort of think immediately think, alright, there's going to be some kind of expense because depreciation is an expense. And you might also think that depreciation results in reducing the book value of your asset to its true book value, not not to the price you actually paid for it initially.

Is there a future benefit future sacrifice or negative future benefit? Well, in this case, it's actually a negative future benefit. Because when you take it depreciation, it's actually reducing the actual future benefit. So therefore, it's a negative future benefit. And was anything on costs incurred or assets consuming this case? Yes, there's been costs incurred because we're actually taking up the depreciation and yes, it has also been consumed to some extent, because of the negative future benefits through the accumulated depreciation.

So when you whenever you take a depreciation journal, you actually credit the asset because the asset Reduces by taking the accumulated depreciation. At the same time you take up an expense for depreciation expense, therefore that gets debited to owner's equity which is a reduction in profit because depreciation is an expense. So therefore, we start off with the contra asset side of accumulated depreciation that gets credited and that depreciation expense gets debited. Another type of contra asset could be when you take an allowance for doubtful debts. So, in which case there is no cash being affected, in this case, the nature of this transaction that you were taking from allowance because you believe there's a possibility your customer may not actually pay the invoice so therefore, you're being taking a conservative approach and actually taking up almost like reversing the impact of that original sale. Is there a future benefit future sacrifice or negative future benefit?

Well, again, it's a contrast that there's going to be a negative future benefit because we're trying to reduce our accounts receivable to its true book value. was anything in costing Coto assets consumed. In this case, we are actually taking up a cost amorosa consuming the asset. So, asset will actually decrease, which gets credited. And we take up lots of debt for debts through the allowance for doubtful debts to account. And at the same time, we've taken up an expensive debt for debt expense, which actually gets debited.

And if you think about this, this is actually the opposite directions to when you make an original sale. So when you make an original sale, you debit or increase the asset and you increase owner's equity. In this case, what you're doing is the opposite to a sale. So therefore, the allowance for doubtful accounts gets credited and the depth for debt expense gets debited. So really, the profit impact of the original sale is now offset so in your profit and loss or even your retained earnings, the net effect is zero profit. Now sitting in your books for this particular invoice.

Or group of invoices. Another type of contra asset is when you actually write off the customer account from your cash receivables. So that's different from when you take up the allowance for doubtful debts. Because this is when the actual customer is gone bad. So for example, it could have gone bankrupt or it's 100% certain you're not going to get that money. Whereas the doubt the allowance for doubtful debts is something you might adjust on an annual basis or quarterly basis as a conservative approach, but when you write off the count, that's actually when you physically run out of your ledger out of your sub ledger account.

So as cash being affected, no, there's no cash impact because the customer never paid us. What is the nature of this transaction, we're actually writing off a customer account or invoice offering account. Miss case, it's a negative future benefit because we're actually reducing our book value of accounts receivable to actually to actually write off the accounts receivable account, but what we're actually doing as well is we're actually going to take this out of the allowance for doubtful debts because that's where we originally made the allowance for. And in which case the impact is going to be your asset will actually decrease. So we write it off the sub ledger account of accounts receivable. And we actually increase the asset through moving that particular cost to the allowance for doubtful debts.

And what you would end up doing is you would create your accounts receivable and you would debit your allowance for doubtful debts. Okay, so now that completes our section of assets, we've covered all of the standard transactions you would cover under the assets and contract assets section. Feel free to review this again and go over this and learn these and we'll be moving on next to the liability section. We'll see them

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