What Is Contra Asset Account.A contra asset account is a type of account that is used to offset the balance of an asset account. It is an account that has a credit balance and is used to reduce the value of the corresponding asset account on the balance sheet.
For example, an allowance for doubtful accounts is a contra asset account that is used to reduce the value of the accounts receivable asset account. The allowance for doubtful accounts represents an estimate of the amount of accounts receivable that may not be collected.
Other examples of contra asset accounts include accumulated depreciation, which reduces the value of fixed assets, and the reserve for inventory obsolescence, which reduces the value of inventory.
The use of contra asset accounts helps to provide a more accurate representation of the value of an asset on the balance sheet by accounting for factors that may reduce the value of the asset over time.
What Is Contra Asset Account Types.
The most common asset counter account is accumulated depreciation. Accumulated depreciation is associated with property, plant and equipment and is credited when depreciation expense is recorded. Recording credits in accumulated depreciation means that the cost of property, plant and equipment continues to be reported. Reporting accumulated depreciation separately allows readers of the balance sheet to see how much of the cost has been depreciated and how much has not yet been amortized.
Another asset counter account is the provision for bad debts. This account appears next to the current assets of accounts receivable. The correcting account for doubtful accounts is credited when a company enters the amounts estimated as debits to bad debt expenses by the allocation method. The use of the provision for bad debts allows the reader to observe the amounts documented in the accounts receivable that the company has the right to collect from its credit customers. The separate credit balance in the bad debt provision account tells the reader how much of the debit balance in accounts receivable is unlikely to be collected.
A less common example of an asset counter account is the discount receivable. The credit balance of this account is amortized or assigned to interest income or interest income during the life of a document receivable.
