What is a Contra Asset Account?

Define Contra Asset Account

Contra means against. In bookkeeping terms, a contra asset account refers to an account which is offset against an asset account.

As an asset account is normally a debit balance, a contra asset account will normally be a credit balance. When the two balances are offset against each other they show the net balance of both accounts.

Contra asset accounts are useful when in bookkeeping terms a business needs to keep the two accounts separate so as not to lose information, but for presentation reasons in the financial statements, it is necessary to offset them against each other and show a net balance.

Contra Asset Account Examples

The two most common examples of contra asset accounts are the accumulated depreciation contra account, and the allowance for doubtful debts contra account.

Accumulated Depreciation is a Contra Asset Account

The accumulated depreciation contra asset account records the depreciation to date of a fixed asset. The account is normally a credit balance and in use is offset against the fixed asset account which is normally a debit. The net balance of the two accounts shows the net book value of the fixed asset. Using the two accounts, allows information about the original cost of the fixed asset to be maintained on the fixed asset account, and details of the depreciation of the asset to be maintained on the accumulated depreciation contra asset account

In the trial balance the accounts would appear as follows.

Trial balance extract showing contra asset account
Account Debit Credit Notes
Fixed assets 4,000 Asset account
Accumulated depreciation 3,000 Contra asset account
…..

In the financial statements the asset account would be offset against the contra asset account to show the net balance.

Balance sheet extract showing contra asset account
Fixed assets 4,000 Asset account
Accumulated depreciation 3,000 Contra asset account
Net book value 1,000 Net balance after offset

Allowance for Doubtful Accounts is a Contra Asset Account

The allowance for doubtful debts contra asset account records the allowance for doubtful debt provision to date of an accounts receivable. The account is normally a credit balance and in use is offset against the accounts receivable account which is normally a debit. The net balance of the two accounts shows the net realizable value of the accounts receivable. Using the two accounts, allows information about the original value of the accounts receivable to be maintained on the accounts receivable account, and details of the allowance for double debts of the asset to be maintained on the allowance for doubtful accounts contra asset account

In the trial balance the accounts would appear as follows.

Trial balance extract showing contra asset account
Account Debit Credit Notes
Accounts receivable account 6,000 Asset account
Allowance for doubtful debts account 1,000 Contra asset account
…..

In the financial statements the asset account would be offset against the contra asset account to show the net balance.

Balance sheet extract showing contra asset account
Accounts receivable 6,000 Asset account
Allowance for doubtful debts account 1,000 Contra asset account
Net book value 5,000 Net balance after offset

Contra asset accounts are the most commonly encountered, however, a business can also have other forms of contra accounts including:

  • Contra revenue account – for example, sales returns and allowances account.
  • Contra equity account – for example, owner’s drawings account, treasury stock account
  • Contra liability account – for example, discount on bonds payable account
  • Contra expense account – for example, expense reimbursement by employees account
What is a Contra Asset Account? November 6th, 2016Team

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