adjunct account definition and meaning

It is typically used to adjust the value of the liability account with a credit to match the total value of debits to asset accounts in a transaction. Assume that a company’s Equipment has a debit balance of $450,000. The related account Accumulated Depreciation of Equipment has a credit balance of $190,000. Therefore, the carrying amount or book value of the equipment is $260,000. Adjunct accounts are intended to provide additional detail to accounting figures and increase the overall transparency of financial reporting. With a valuation account from which the credit balance is joined with another account, you are able to get an understanding of the value of bonds.

1. The concept of an adjunct account can be contrasted with the concept of a contra account, which decreases the amount of a liability account through a debit entry.
2. An adjunct account is an account in financial reporting that increases the book value of a liability account.
3. The primary purpose of these accounts is to reflect the true value of the related assets or liabilities on the balance sheet, ensuring accurate financial reporting.
4. In both examples, the adjunct accounts or positions serve specific, supplemental purposes.
5. For instance, a contra account to a receivable account is the allowance for doubtful account or, worse still, bad debt reserve.

The balance in this account represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. Another example is the “discount on bonds payable” account, which is an adjunct account to the “bonds payable” account. The discount on bonds payable represents the difference between the face value of the bonds and the amount received when the bonds were issued, if the bonds were issued at a discount. The balance in the discount on bonds payable account is subtracted from the face value of the bonds to arrive at the carrying value of the bonds payable on the balance sheet. When a contra asset account is first recorded in a journal entry, the offset is to an expense.

Example of an Adjunct Account

For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense. As we continue to delve deeper into the intricacies of financial reporting, the role of these valuation accounts, adjunct and contra, becomes more apparent. A contra account is always used in a general ledger, but the net amount may also be a carrying amount. For instance, a contra account to a receivable account is the allowance for doubtful account or, worse still, bad debt reserve.

There are two major methods of determining what should be booked into a contra account. Because it increases the liability account, it cannot be a contra account – which reduces liabilities. An adjunct account refers to an account that leads to increase in the book value of a liability account.

How to Make Entries for Accrued Interest in Accounting

The balance in an adjunct account is added to the balance in the primary account to arrive at the adjusted carrying value of the related asset or liability. In accounting, a contra account is an account used alongside a related account to record transactions that offset or reduce the balance of the related account. Contra accounts are used to provide a clearer picture of a company’s financial position by showing adjustments to specific accounts. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. A debit will be made to the bad debt expense for $4,000 to balance the journal entry.

What Does Prepaid Mean in Accounting?

For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately. A discounted bond’s discount is an apt example of a contra account. The discount, representing the difference between the face value of the bond and its selling price, is placed into a contra account. This account, known as Discount on Bonds Payable, decreases the carrying amount of the bond liability, reflecting its actual market value. Some accountants might apply the term adjunct accounts to both the Discount on Bonds Payable and for the Premium on Bonds Payable while others might use the term valuation accounts instead.

The unamortized premium and the bond liability, when combined, represent the actual liability of the issuer. A contra account is a general ledger account with a balance that is opposite of the normal balance for that account classification. For example, in a contra account, a discount on bonds payable account would result in a debit to a liability account. The discount on the bonds payable account is referred to as a contra account, and this is because it is a liability account with a debit amount. In this instance, the carrying value of the bonds will start at $97,000, since the $100,000 in bonds payable is a compensating equivalent to the $3,000 debit in discount on bonds payable.

Another example of a contra account is accumulated depreciation. This account represents the gradual loss in value of an asset over time due to wear and tear, obsolescence, or other factors. By subtracting the accumulated depreciation from the cost of the asset, the company can present the net book value of the asset, providing an accurate representation of its current worth. In the above example, the debit to the contra liability account of $100 lets the company recognize that the bond was sold at a discount.

The resulting balance in the Bonds Payable account accurately reflects the obligation of the company to its bondholders. An adjunct account is a valuation account that increases the book value or carrying value of a liability account. For example, a contra account to Accounts Receivable is the Allowance for Doubtful Accounts or Bad Debt Reserve. Since it is a contra asset account, the Allowance for Doubtful Accounts must have a credit balance.

In other words, the contra liability account is used to adjust the book value of an asset or liability. An https://personal-accounting.org/ increases the valuation of a liability account. In essence, the credit balance in this account is added to the liability account with which it is paired. The most common example of an adjunct account is the unamortized bond premium account, which is used when a business sells bonds at a premium. The unamortized bond premium and the bond liability, when combined, represent the actual liability of the bond issuer. Adjunct accounts are rarely used in smaller businesses that deal with relatively simple business transactions.

It is not classified as a liability since it does not represent a future obligation. A liability that is recorded as a debit balance is used to decrease the balance of a liability. Contra liability, equity, and revenue accounts have natural debit balances. 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. An adjunct account is an account in financial reporting that increases the book value of a liability account.

Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. These contra revenue accounts tend to have a debit balance and are used to calculate net sales.

Categorised in: Bookkeeping

This post was written by James Habib