What is A Contra Asset Account?

A Contra Asset is the reversal of an Asset Account or Negative Assets Account because it is deducted from its closing balance in the Balance Sheet. Best Examples for Contra Asset Accounts or Negative Assets Accounts are Allowance For Doubtful Debts Accounts And Accumulated Depreciation. It is created to adjust the balance of An Asset on the happening of an event. For Example, the debts due from few customers may be recoverable or not. So, a provision / allowance for doubtful debts is created in order to provide true information related to collectibles and uncollectibles of the business.

Contra Asset Account provides fair and true information to the Users of Financial Statements as they get the Net Value of Assets that actually an entrepreneur or a company owns and controls to provide probable future benefits to the business.

What happens if Contra Asset Account is not Reported on Income Statement Or Balace Sheet?

When the value of Contra Asset account is not reported, then the balance of relevant asset account is overstated and current year’s profit is also overstated. For Example, If Depreciation on Furniture for Rs. 5000 is not recorded, then Net Profit or Net Income also increases while the cost of Furniture shows more Closing Balance on Balance Sheet. The Accounting Journal Entry for Depreciation Expense on Furniture is shown below:

                        Depreciation Expense a/c - Furniture   5000

                                                               Accumulated Depreciation a/c - Furniture  5000

                                         (Depreciation on Furniture Rs. 5000 Charged For The Year)

So, if Accumulated Depreciation is not deducted from Furniture on Balance Sheet, then Net Profit / Net Income will surely increase and Closing Balance of Furniture will be overstated by Rs. 5000.

So, Contra Asset Account is created to reduce the balance of relevant assets’ balances and gives a true and fair view of Financial Statement to the Users of Financial Statements.