Monday, October 12, 2009

Contra Asset Liquidation Bankruptcy

How do you account for a contra asset on the balance sheet when a company is undergoing liquidation or bankruptcy?

Generally, a contra account is for depreciation or a provision for bad debts on the general ledger.

When undergoing bankruptcy or a liquidation, the asset book values are debited to a realization account and the provisions credited to the account. The balance of the realization account will now be the NBV of those assets.

As these assets are sold DEBIT cash and CREDIT realization account.

For a further example, a common contra asset account on an asset sold would be Accumulated Depreciation, as well as Allowance for doubtful debts.

Where you have a liquidation account on the part of the liquidator, the balance on the realization account in the case of a liquidation will be split between the interested parties in accordance with the prevailing company's liquidation laws or bankruptcy laws.

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