Definition of Contra Asset Account
A contra asset account is an asset account where the account balance is expected to be a credit balance. It is described as “contra” because having a credit balance in an asset account is contrary to the normal or expected debit balance. (A debit balance in a contra asset account will violate the cost principle.)
Examples of Contra Asset Accounts
The most common contra asset account is Accumulated Depreciation. Accumulated Depreciation is associated with property, plant and equipment (plant assets). Accumulated Depreciation will be credited when Depreciation Expense is recorded. The credit balance in Accumulated Depreciation means that the cost of the property, plant and equipment will continue to be reported. Looking at the cost of the plant assets and the credit balance in Accumulated Depreciation allows us to see how much of the plant assets’ cost has been depreciated and how much has not been depreciated.
Another contra asset account is Allowance for Doubtful Accounts. This account appears next to the current asset Accounts Receivable. The account Allowance for Doubtful Account is credited when the account Bad Debts Expense is debited under the allowance method. The use of Allowance for Doubtful Accounts allows us to see in Accounts Receivable the total amount that the company has a right to collect from its credit customers. The credit balance in the account Allowance for Doubtful Accounts tells us how much of the debit balance in Accounts Receivable is unlikely to be collected.
A less common example of a contra asset account is Discount on Notes Receivable. The credit balance in this account is amortized or allocated to Interest Income or Interest Revenue over the life of a note receivable.
