Learn Accounting Entries For Contra Assets Account On Your Own:

Simply, Contra means opposite. In accounting terms, a contra asset account refers to that account which is created to compensate against an asset account. An asset account normally shows a debit balance, but a Contra Asset Account normally shows a credit balance. When the balances of these two accounts are counterbalanced against each other they show the net balance of both accounts. Contra Asset Account are normally linked to specific accounts on the balance sheet and are reflected as deduction from these accounts. In other words, Contra Asset Account are used to deduct the balances of normal assets accounts on the balance sheet.

For example; Machinery is a long-term asset account and normally shows a debit balance. Machinery is depreciated over its productive life. The amount of this depreciation is credited in a Contra Asset Accountt called Accumulated Depreciation Account. This account shows a credit balance and is used to reduce the value of the machinery from its historical cost. The balance sheet would report Machinery Account at its historical cost and then subtract the accumulated depreciation.

Contra Asset Account are useful for the interested parties to get more relevant information about the concern if the Machinery was reflected at its historical cost. With Contra Asset Account readers can not only see the actual cost of the item; but also see how much of the asset is written off as well as estimate the remaining useful life and value of the Asset.

The same also stands true for Accounts Receivable. Accounts Receivable is rarely reflected in the balance sheet at its net amount or good debts. Instead, it is reported at its full value with provision for bad debt. This reflects the investors how much amount of receivables are still good. Maybe more importantly, it shows the potential investors and the creditors what percentage of receivables the company is writing off.