Definition of Asset Account Balances
In accounting, asset accounts normally have debit balances. That is, the general ledger accounts for assets typically have their balances on the left side. This is also the case with T-accounts and is consistent with the accounting equation ( Assets = Liabilities + Owner's Equity) where the asset account balances are on the left side.
However, there are a few general ledger asset accounts that must have credit balances. These accounts are known as contra asset accounts since their credit balances are contrary to the usual debit balances found in most asset accounts.
Examples of Asset Accounts with Credit Balances
Two examples of contra asset accounts are:
- Accumulated Depreciation which is associated with a company's property, plant and equipment accounts
- Allowance for Doubtful Accounts which is associated with the Accounts Receivable
There are also situations where an unwanted credit balance appears and will need attention. Here are a few examples:
- An error caused by posting an amount to an incorrect account
- Continuing to depreciate or amortize an asset after the carrying value has been reduced to $0
- Receiving and posting a customer's payment that was greater than the customer's balance in Accounts Receivable
- Continuing to reduce the balance in Prepaid Expenses and charging expense after the balance in Prepaid Expenses has been reduced to $0
- The amount of checks written exceeded the positive amount in the Cash account
Before issuing the balance sheet, any errors (such as first two items) need to be corrected. The accounts with credit balances such as those in the last 3 items above need to be reclassified to a current liability account.