Corrective Accounts

Corrective or counter accounts are accounting accounts that are used to adjust the value of certain accounting items.

The assets of the companies are generally recorded at acquisition value. Due to the passage of time or continued use, the assets suffer a loss in their value and benefits. These losses, depreciations, amortizations or impairments must be accounted for in the financial statements to reflect at all times the real value of the asset. Therefore, the corrective accounts can be understood as accounting items that serve to correct the value of the assets due to the depreciation, amortization and / or deterioration that these suffer over time.

Types of corrective accounts

The General Accounting Plan (PGC) distinguishes two types of corrective accounts.

  • Accumulated depreciation accounts: Correct the value of tangible and intangible fixed assets due to the wear and tear suffered by the use and the passage of time (depreciation of machinery or amortization of a patent for example).
  • Provision accounts: They are used to correct the loss of reversible value of any type of asset, such as provisions for impairments of accounts receivable or provisions for impairment of inventories.

Example of counter accounts

The company XYZ bought machinery in January of the year 2XX1 for € 50,000 paying cash. The company amortizes its machinery in 5 years and follows the linear amortization method. It is requested to find the book value in the year 2XX2.

Since the company pays for the linear method, it will amortize 10,000 each year. This is the result of dividing the value of the machinery between the useful years of life (50,000 / 5 = 10,000).
Therefore, to reflect the value of the machinery in the year 2XX3, the company will have to use the accumulated amortization corrective account, to reduce the value of the asset in its financial statements. In this way the company reflects the real value of the machinery at all times.

Purchase of machinery on January 1, 2XX1

Should To have
(213) Machinery 50,000 (572) Banks, c / c 50,000

After this purchase the machinery would appear in the non-current assets of the company worth 50,000. After this the company has to amortize its machinery year after year and reflect the accumulation of that amortization.

 

Amortization as of December 31, 2XX1

Should To have
(682) Amortization of property, plant and equipment 10,000 (282) Cumulative amortization of property, plant and equipment 10,000

 

Amortization as of December 31, 2XX2

Should To have
(682) Amortization of property, plant and equipment 10,000 (282) Cumulative amortization of property, plant and equipment 20,000

 

As we see in the example, the company has amortized every year the machinery worth € 10,000. After 2 years the company has accumulated a total of € 20,000 with the amortization of the machinery. In this way the value of the machinery is corrected and adjusted to its current real value of € 30,000.

 

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