Contra-asset

Definition

A contra-asset is an account that reduces the value of a related asset on the balance sheet. It is typically used to account for depreciation, allowances for doubtful accounts, or accumulated amortization.

5 Must Know Facts For Your Next Test

1. Contra-assets are paired with specific asset accounts to show net values.
2. Examples include Accumulated Depreciation and Allowance for Doubtful Accounts.
3. They have a normal credit balance, unlike regular asset accounts which have a debit balance.
4. Contra-assets help in more accurately reporting the true value of assets.
5. The use of contra-asset accounts follows the matching principle in accounting, ensuring expenses are matched with revenues.

Review Questions

• What is the purpose of a contra-asset account?
• Name two common examples of contra-asset accounts.
• How does a contra-asset account affect the balance sheet?

Related terms

Asset: An economic resource owned by a business that is expected to bring future benefits.

Depreciation:

The process of allocating the cost of a tangible fixed asset over its useful life.

Allowance for Doubtful Accounts:

A contra-asset account used to estimate uncollectible receivables.