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What is a matching account?


An offset account is a negative account that is deducted from the balance of another account on the balance sheet. The two most common offsetting accounts are the allowance for doubtful accounts / bad debt reserve, which is subtracted from accounts receivable, and accumulated depreciation, which is subtracted from fixed assets.

Contra stories are confusing at first, but with a little study understanding them becomes second nature. Let’s see how they work and what the main types are, then finish with an example.

Image source: Getty Images.

Understanding Offset Accounts

Offsetting accounts exist when the account on the balance sheet needs to be reduced by a different account to show its true value. For example, GAAP (or generally accepted accounting principles) accounting requires that fixed assets be reported at cost on the balance sheet, but over time this value depreciates as the assets are used. The balance sheet will show a gross value of fixed assets, an offsetting account value for accumulated depreciation and a net worth. All three values ​​can be useful to investors depending on what they are looking for.

If you are evaluating a low growth business based on its capital assets, you want to use equity to be on the safe side. On the flip side, if you watch a high-flying growth stock that brings in new record revenue growth each quarter but has a massive allowance for bad accounts, issues can arise.

Types of Offset Accounts

You can find offsetting accounts all over the balance sheet. Let’s discuss the most common types.

Counter assets

The allowance for doubtful accounts and accumulated amortization are the most common contra assets. Here is how they work:

The allowance for doubtful accounts is deducted from the accounts receivable balance. The company predicts which accounts receivable will not be paid by customers and cancels them. When the account receivable is written off, it is added to the bad debt expense on the income statement and placed in the offsetting account. If a business has a high or rapidly growing accounts receivable percentage allowance, watch it closely. It could grow with bad accounts, and cash flow will be affected.

Accumulated depreciation is the total of all depreciation that has been charged to existing fixed assets such as equipment and buildings. There can be hidden value in stocks that have a lot of fully depreciated buildings. Businesses like to write off assets as quickly as possible for tax savings, so the balance sheet may not show the true value of the fixed asset.

Matching liabilities

Matching liabilities are common in companies that sell bonds to raise capital. To attract interest on the bond, the company will sell it at a discount. For example, a bond with the principal amount of $ 1,000 can be sold for only $ 950. The bond is carried on the balance sheet for the full amount of $ 1,000, but the money received is only $ 950, so a matching liability for the surrender is listed to establish the entry balance.

Counterparty equity and counterparty income

The equity section of the balance sheet is where the shareholder’s rights to the assets are declared. The main equity counterpart account consists of treasury shares, which correspond to the balance of all the shares bought back by the company. When a company repurchases shares, it increases the fraction of ownership of all remaining shareholders.

Revenue is an income statement, but it is also transferred to the equity section of retained earnings. Counter-income accounts are discounts and returns. All products sold with a discount or returns are deducted from gross income to produce net income as the top line of the income statement.

Example of a counterpart account

Let’s look at the counterpart accounts discussed above on Home Depot. (NYSE: HD) balance sheet.

Counter assets

Home Depot Review.

Source: Home Depot.

Home Depot reports net receivables and net property, plant and equipment, implying that both are reduced by counterpart assets. We’ll have to dig into the footnotes to find out what the contra accounts are.

In footnote 3, the company states, “Net property, plant and equipment includes accumulated depreciation of $ 25.3 billion as of August 1, 2021 and $ 24.1 billion as of January 31, 2021.”

The allowance for doubtful accounts is not specifically reported, but the 10 (K) indicated that the allowance is irrelevant to the amount. This makes sense, as Home Depot would not have accounts receivable with long payment terms. Most accounts receivable would only be the time between purchase and payment by credit card.

Counter-equity

Home Depot Equity

Source: Home Depot.

Treasury shares in the equity counterpart account are carried directly to the balance sheet. Home Depot has repurchased more than $ 72 billion of shares to date, including approximately $ 7 billion during this accounting period.

Home Depot also dedicates Footnote 4 to its share buyback program and reports that the company is authorized by its board of directors to repurchase $ 20 billion in shares.

Counterpart income

Home Depot Sales

Source: Home Depot.

The Home Depot reports that returns are estimated at the time of sale based on historical return numbers. The amount is not reported and the amount of net sales is reported in the income statement.

Contra accounts are worth a look

As you saw in the example, offset accounts can be an important part of your financial statement analysis, but they are hard to find. Companies bury them in the footnotes and often don’t detail the actual calculation. Still, it’s important, when possible, to consider how net accounts are calculated and be wary of companies reporting a ton of bad debt.