MCQ Detailed View

A contra-asset account is an account used in accounting to reduce the value of a related asset account without directly decreasing the asset’s original recorded amount. Instead, the contra-asset account holds a balance that offsets the asset account in the financial statements.

Typically, asset accounts carry a debit balance because they represent resources owned by the business. However, a contra-asset account has a credit balance, which is opposite to the normal balance of an asset account. This is why the correct answer is Credit.

One of the most common examples of a contra-asset account is Accumulated Depreciation. For example, if a company owns machinery worth $100,000, it records the machinery in the asset account at its purchase price. Over time, depreciation is recorded in the accumulated depreciation account (a contra-asset), which gradually reduces the book value of the machinery without altering the original asset cost entry.

Other examples of contra-asset accounts include Allowance for Doubtful Accounts, which reduces Accounts Receivable to reflect the estimated uncollectible amounts, and Provision for Obsolete Inventory, which reduces the value of inventory likely to become unsellable.

In financial reporting, the asset and its related contra-asset are shown together to reflect the net realizable value. This approach provides greater transparency, as it shows both the original cost and the total reduction due to depreciation, doubtful debts, or other factors.

Understanding the nature of contra-asset accounts is important for both accountants and business owners because it ensures accurate valuation of company resources and compliance with accounting standards.

Key Points:

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  Definition: Account that offsets an asset account

  
  


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  Normal Balance: Credit (opposite of asset’s debit balance)

  
  


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  Examples: Accumulated Depreciation, Allowance for Doubtful Accounts

  
  


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  Purpose: Reduce asset value without changing original cost record

  
  


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  Financial Reporting: Shows net asset value by combining asset and contra-asset

  
  


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  Transparency: Helps display both original cost and reductions clearly