A contra asset shows a zero or negative balance on your company’s balance sheet. This type of listing offsets the balance in the asset account associated with the contra asset, thereby reducing an asset’s overall value. A normal asset has a debit balance, while a contra asset sits against this to show the net balance of both assets on your financial statement. In some sense, you can consider a contra asset as a negative asset. The reason you show a contra asset on a balance sheet is so you can see the overall net balance of a particular asset and to give investors a more accurate look into your company’s financial activity.
Accumulated Depreciation as a Contra Asset
The two most common contra accounts on a balance are accumulated depreciation and the allowance for doubtful debts. Accumulated depreciation tallies the depreciation to date of a fixed asset, such as a car or a building. For example, if you bought a car for $10,000 seven years ago and you estimated a seven-year life on the vehicle. Now, the car is worth less than $1,000 and you continue to put more money into upkeep, maintenance, and insurance for the car than the value of the vehicle. Although the car is normally an asset because you can sell it for parts or use it for your business, when the car depreciates to a zero or negative balance, it is a contra asset on your balance sheet.
Doubtful Debts and Contra Assets
A doubtful debts contra account allows for future write-offs of accounts receivable. Although you have not officially written off these debts yet, you show them to be a negative balance because you don’t believe the customer will pay you. For example, if your business has accounts receivable of $50,000 and an allowance for doubtful debts account totaling $5,000, the net accounts receivable is $45,000. In this way, a contra asset (credit) lowers the overall value of your accounts receivables (debit) on the balance sheet.
Showing contra assets on your balance sheet allows potential investors to see how you write-down a depreciable asset, such as a piece of equipment. Contra assets give investors a better picture of how you use your assets over time.
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