What Is an Adjunct Account?
An adjunct account is an account in financial reporting that increases the book value of a liability account. An adjunct account is a valuation account from which credit balances are added to another account. The concept of an adjunct account can be contrasted with the concept of a contra account, which diminishes the amount of a liability account through a debit entry.
An adjunct account is likewise in some cases just alluded to as a valuation account.
How an Adjunct Account Works
An adjunct account comprises of sections that increase the book value of a liability account. Adjunct accounts are planned to give extra detail to accounting figures and increase the overall transparency of financial reporting.
Adjunct Account versus Contra Account
An adjunct account might be contrasted to a contra account. A contra account is an overall ledger account with a balance that is inverse of the normal balance for that account classification. For instance, in a contra account, a discount on bonds payable account would result in a debit to a liability account.
A contra account is utilized to reduce the value of a connected account when the two are netted together. Or on the other hand, in less difficult terms, a contra account offsets the balance of a relating account. It permits a company to report the original amount and furthermore report a reduction so the net amount will likewise be reported. A contra account's natural balance is something contrary to the associated account, yet they are reported on a similar financial statement. On the off chance that a debit is the natural balance kept in the connected account, the contra account records a credit.
A contra account is utilized in a general ledger. The net amount may likewise be alluded to as the carrying amount or the net realizable amount.
For instance, 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. The balance in this account addresses the dollar amount of the current accounts receivable balance that is expected to be uncollectible.
Thus, assuming that the Accounts Receivable account has a debit balance of $20,000 and the Allowance for Doubtful Accounts has a credit balance of $2,000, any perusers of the company's balance sheet will see that customers owe $20,000 for past purchases however the company doesn't anticipate collecting $2,000 of the $20,000.
Different types of contra accounts incorporate Accumulated Depreciation, Discount on Notes Payable, Bond Issue Costs, Discount on Notes Receivable, LIFO Reserve, and certain investment accounts.
Illustration of an Adjunct Account
On the off chance that a company issues bonds, the Unamortized Premium on Bonds Payable account (at times essentially called Bond Premium account) is an adjunct account on the grounds that its credit balance is added to the amount in the Bonds Payable account (to decide the book value of the bonds). The unamortized premium and the bond liability, when combined, address the genuine liability of the issuer.
For instance, on the off chance that a company issues $100,000 of its bonds payable for $97,000, it will give the bonds at a discount rate of 3%. The company's entry will incorporate a debit to Cash for $97,000, a credit to Bonds Payable for $100,000; and a debit to Discount on Bonds Payable for $3,000. The Discount on Bonds Payable account is a contra account since it is a liability account with a debit amount.
A few accountants could apply the term adjunct accounts to both the Discount on Bonds Payable and for the Premium on Bonds Payable while others could utilize the term valuation accounts all things being equal.
In this case, the carrying value of the bonds will start at $97,000, since the $100,000 in Bonds Payable is offset by the $3,000 debit in Discount on Bonds Payable.
- An adjunct account is an account in financial reporting that increases the book value of a liability account.
- The concept of an adjunct account can be contrasted with the concept of a contra account, which diminishes the amount of a liability account through a debit entry.
- An adjunct account is a valuation account from which credit balances are added to another account.