A contra asset account is a type of counter account that is used to adjust the debit balance of the main asset account. The contra asset account is considered only in interaction with the main active account, and the latter can only be an asset, and the regulating contract account – liabilities. The credit balance of the contra liability account reduces the debit balance of the main asset account.
Contra Asset Account Definition
Contra asset accounts can include the following accounts:
- Depreciation of fixed assets;
- Amortization of intangible assets;
- Provisions for depreciation of tangible assets;
- Provisions for impairment of investments in securities;
- Reserves for doubtful debts.
Accounting of fixed assets owned by the organization is carried out on the accounts at cost, but in accounting, financial reporting (in particular, in the balance sheet) data is reflected on the residual value, defined as the difference between the initial value and the amount of depreciation accumulated throughout their operation.
Examples of Contra Asset Account
For an example of using a contra asset account. Let us assume that an organization has fixed assets in the amount of 300 thousand.
The debit balance is also provided by contra accounts that specify the assessment of indicators on capital and liabilities accounts (contra liabilities accounts), and the regulatory balance on contra accounts that specify the assessment of indicators on asset accounts is located on the account’s credit, i.e. such accounts have a credit balance.
Accumulated depreciation (for natural resources in Western accounting — depletion) is recorded on the credit of regulatory contractual accounts.
To account for the wear and tear of low-value and high-wear items, a contra account regulating the wear and tear of low-value and high-wear items are used. Depreciation is the cost of production and is included in the cost of production. Essentially, it is the indirect costs that are related first to the debit of accounts under the account of expenses on service of production and management.
The calculation of the matching shares (parts) wear is produced on release from the warehouse into operation the debit the relevant account cost or source of funding to cover depreciation and loan account wear. Thus, depreciation on goods released for production purposes is reflected in the debit of the general production and general economic expenses accounts and the credit of the depreciation account of the balance. The remaining part of the cost of goods (less the cost of remaining scrap metal, rags, etc. at the price of their possible use) is written off to the cost of disposal (write-off according to the act).
Contra asset accounts are designed to clarify the balance of the main asset accounts. There are two accounts involved: the main account and the regulatory account. The main account acts as an active account, while the regulatory account acts as a liabilities account (opposing or contra asset). A contra account reduces the balance of the main active account by the amount of its balance.