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Cross References and Contra Items

Moneyzine Editor
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Moneyzine Editor
2 mins
January 12th, 2024
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Cross References and Contra Items

Definition

The financial accounting term cross references and contra items refers to an approach used to disclose information appearing on a company's financial statement. Cross references allow the reader to understand how assets are related to liabilities, while contra items are used to increase or decrease assets and liabilities.

Explanation

Cross references and contra items are one of several ways to communicate material information that is supplementary to the items appearing on the company's balance sheet. Cross references are used to communicate direct relationships between assets and liabilities. Contra accounts are used to reduce an asset, liability, or owner's equity line item. In addition to contra accounts, adjunct accounts are used to communicate an increase to an asset, liability, or owner's equity line item.

Cross references are similar to parenthetical explanations, since the relationship is oftentimes a concisely written message prominently displayed within the body of the financial statement. The most commonly used contra account is accumulated depreciation. Displaying explanations in this manner is thought to be advantageous when compared to other communication methods such as supporting schedules or notes that might accompany the statement.

Contra and adjunct accounts often appear immediately below the line item they're affecting. Such disclosures are deemed necessary if the information appearing on a statement is thought to be misleading without their inclusion.

Example

Contra Account

Company A's balance sheet indicates accounts receivable of $4,292,300 and the contra account, allowance for doubtful accounts, contains a balance of $425,300. The net receivables of Company A, as shown on the balance sheet would be:

Accounts Receivable

$4,292,300

Less: Allowance for Doubtful Accounts

$425,300

Net Accounts Receivable

$3,867,000

Cross Reference

Company A uses a financial institution that acts on their behalf when notes payable come due. Company A has created a cash account with this agent to fund a $100,000 promissory note coming due in less than 12 months. The cross references appearing on Company A's balance sheet would be:

Current Assets

Cash on deposit with agent for redemption of notes payable: see Current Liabilities

$100,000

Current Liabilities

Notes payable to be redeemed in less than 12 months: see Current Assets

$100,000

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