Contra asset account definition
/What is a Contra Asset Account?
A contra asset account is an asset account with a natural credit balance. Nearly all asset accounts have a natural debit balance. This account is paired with and offsets another asset account, so that a net balance is reported on the balance sheet.
Examples of Contra Asset Accounts
There are three contra asset accounts that commonly appear in an organization’s chart of accounts.
Allowance for Doubtful Accounts Account
The first contra asset account is the allowance for doubtful accounts. It is paired with the trade accounts receivable account, and contains a reserve for receivables that are unlikely to be paid by customers. By combining the balances in these two accounts, you can determine the net amount of receivables that the reporting entity expects to receive. The size of the reserve also reveals the amount of bad debt that the company expects to experience from the current set of receivables.
Accumulated Depreciation Account
The second contra asset account is accumulated depreciation. It is paired with all of the fixed asset accounts, and contains the cumulative amount of depreciation expense that has thus far been charged against those fixed assets. By combining the balances in these accounts, you can determine the net amount of fixed assets that have yet to be charged to expense. Calculating the proportion of accumulated depreciation to fixed assets also provides an indicator of the age of the assets, where a large accumulated depreciation amount indicates that the associated assets are fairly old. The balance in this account is reduced when a related asset is removed from the accounting records.
Discount on Notes Receivable Account
The third contra asset account is the discount on notes receivable. It is paired with the notes receivable account, and contains the amount of the unamortized discount associated with the notes. The balance in this account declines over time as the discount is slowly amortized. It can initially include quite a large balance, depending on the initial size of the discount.
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Presentation of Contra Asset Accounts
A business might elect to separately state contra asset accounts on its balance sheet, so that the users of its financial statements can obtain additional information about the contents of these accounts. For example, showing the amount of accumulated depreciation allows investors to compare the fixed asset balance to the accumulated depreciation; if there is a high proportion of accumulated depreciation to fixed assets, this reveals that the company’s fixed assets are fairly old, and so may be in need of replacement.