The contra accounts noted in the preceding table are usually set up as reserve accounts against declines in the usual balance in the accounts with which they are paired. For example, a contra asset account such as the allowance for doubtful accounts contains a credit balance that is intended as a reserve against accounts receivable that will not be paid. Since expenses are usually increasing, think “debit” when expenses are incurred.

So for example there are contra expense accounts such as purchase returns, contra revenue accounts such as sales returns and contra asset accounts such as accumulated depreciation. Additional expenses that a company might prepay for include interest and taxes. Interest paid in advance https://www.bookstime.com/ may arise as a company makes a payment ahead of the due date. Meanwhile, some companies pay taxes before they are due, such as an estimated tax payment based on what might come due in the future. Other less common prepaid expenses might include equipment rental or utilities.

Normal Balance of Accounts

Remember, if the business is operating a purely cash-based system, these adjustments are not required. Regardless of whether it’s insurance, rent, utilities, or any other expense that’s paid in advance, it should be recorded in the appropriate prepaid asset account. normal balance of accounts Expenses that are used to make payments for goods or services that will be received in the future are known as prepaid expenses. But, as the benefit of the prepaid expense is realized, or as the expense is incurred, it is recognized on the income statement.

The adjusting entry on January 31 would result in an expense of $10,000 (rent expense) and a decrease in assets of $10,000 (prepaid rent). So far, we have worked through some of the theories behind prepayments, particularly the type of account, a current asset, and the normal balance of prepaid insurance being a debit. Now it’s time to look at some simple journal entries that would be made to account for prepaid insurance. Also known as prepayments, prepaid expenses are payments for operating expenditure paid now for goods or services yet to be received by the reporting entity. In our case, we will be looking at prepaid insurance, a pretty standard balance day adjustment businesses have to make if they are using an accrual accounting system.

Income Statement

The debit or credit balance that would be expected in a specific account in the general ledger. For example, asset accounts and expense accounts normally have debit balances. Revenues, liabilities, and stockholders’ equity accounts normally have credit balances. A contra account contains a normal balance that is the reverse of the normal balance for that class of account.

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

Opening Balance Adjustment

What is financial literacy and why do you need it

Financial literacy is the ability to understand and use financial concepts in order to make better decisions. Woodman’s articles have been published in “Professional Distributor” magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.