What Is a Contra Asset Account?

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The balance of contra asset accounts affects financial results.
The balance of contra asset accounts affects financial results. (Image: statistic image by Soja Andrzej from <a href='http://www.fotolia.com'>Fotolia.com</a>)

In double-entry accounting, each type of account--asset, liability, revenue, expense, and owner's equity--has a normal balance of either debit or credit. Contra accounts are the exception to this rule.

Definition

Assets normally carry a debit balance but can be reduced by related accounts known as contra assets. Contra assets are used to reduce the value of other assets on the balance sheet summary.

Attributes

The contra asset account has a normal balance of credit. Accountants place it on the balance sheet summary directly below the asset it reduces and directly above the net asset value.

Usage

Accountants use a contra asset account to track reductions to an asset separately from the asset itself. The resulting benefit is that the balance sheet summary shows the original value of the asset, the amount by which the asset has been reduced and the asset's net value.

Examples

Two common contra asset accounts are accumulated depreciation and allowance for doubtful accounts. Accumulated depreciation reduces the net value of fixed assets as they are expensed over their useful life, and the allowance for doubtful accounts offsets the value of accounts receivable by an estimate of uncollectible sales.

Effect on Financial Statements

Understating a contra asset account understates the related expense on the income statement and overstates the net value of the asset, total assets and owner’s equity on the balance sheet summary. Overstating a contra asset has the opposite effect on those values.

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