Building Your Business What Is a Contra Asset? Contra Asset Accounts Explained in Less Than 3 Minutes By Nora O'Malley Nora O'Malley Website Nora O'Malley covers small business finance and entrepreneurship topics for The Balance. Along with her writing work, Nora is an entrepreneur and consultant who opened an all-tap wine bar in New York's East Village dubbed Lois and owns a sophisticated snack food business Aida. For her businesses, Nora is responsible for finances, marketing, operations, and fundraising. Along with The Balance, her writing has appeared in Thrillist, Insidehook and Vinepair. learn about our editorial policies Updated on July 30, 2022 Reviewed by Robert C. Kelly Reviewed by Robert C. Kelly Robert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive. He is a professor of economics and has raised more than $4.5 billion in investment capital. learn about our financial review board Share Tweet Pin Email In This Article View All In This Article Definition and Examples of Contra Assets How Contra Asset Accounts Work Types of Contra Assets Photo: Deepak Sethi / Getty Images A contra asset is a negative account used in double-entry accounting to reduce the balance of a paired asset account in the general ledger. Learn why contra accounts, when utilized correctly along with a paired account, are a crucial component of accurate accounting and financial review. Definition and Examples of Contra Assets Contra assets are accounts in the general ledger—where you enter your transactions—that carry a balance used to offset the account with which it is paired. Instead of debiting the asset account directly, the contra asset account balance will be credited (reduced) separately. Alternate name: Contra asset account Note Debits increase asset or expense accounts and decrease liability and equity accounts. Credits increase liability and equity accounts and decrease asset or expense accounts. A contra asset is a negative asset account, so it is reduced by crediting. Both values will be reported on the balance sheet either as separate line items or as a net amount reflecting the value of the associated asset account. Keeping the credits and debits separate in two different accounts allows for more transparent financial tracking and reporting. A key contra asset account commonly found in the general ledger is the accumulated depreciation account, which is a contra account used to reduce the equipment or fixed asset account. Displaying both the fixed asset account and the accumulated depreciation contra account allows a company to clearly report both the historical cost of certain fixed assets and the associated depreciation over the useful life of the items. How Contra Asset Accounts Work Contra asset accounts are useful tools in double-entry accounting. They are also helpful for keeping the books balanced and creating a clear trail of financial breadcrumbs for historical review and reporting. For instance, it is common to keep the purchase price of a piece of equipment as a historical cost in the debit asset account when it comes to fixed assets. Most accountants choose to record the depreciation over the useful life of an item in the accumulated depreciation contra asset account, which is a credit account. The balance sheet would show the piece of equipment at its historical cost, then subtract the accumulated depreciation to reflect the accurate value of the asset. Note Whether reported as separate lines on the financial report or as a cumulative value, the net amount of the pair of accounts is called the “net book value” of the individual asset. This type of reporting allows anyone analyzing the balance sheet to understand much more about the company and its assets than if they were to simply look at the net value of the depreciated asset. By reflecting both accounts on the balance sheet, analysts can understand both the original price and the total decrease in value of a certain asset over time. Additionally, when the item is sold, the accumulated depreciation associated with it is eliminated from the books, which is much easier to do when these two values are balanced using a contra asset account. Types of Contra Assets While accumulated depreciation is the most common contra asset account, the following also may apply, depending on the company. Allowance for Doubtful Accounts The allowance for doubtful accounts is a contra asset because it reduces the value of the accounts receivable (AR) account on the general ledger. Often when a company extends goods on credit, management expects some of those customers not to pay and so anticipates writing off bad debt. Note Modern accounting software will automatically populate and pair the accounts and contra assets. To offset this, the allowance for doubtful accounts balance is adjusted via a credit, while the bad debt account is debited to balance out the AR account. When combined, the AR account and the allowance for doubtful accounts contra assets offer a projection of how much net cash is expected to be received from outstanding accounts. Obsolete Inventory Far less common is the obsolete inventory reserve, which reduces the overall inventory value on the balance sheet. This contra account holds a reserve, similar to the allowance for doubtful accounts. For each debit against the inventory account, there will be a corresponding credit against the obsolete inventory contra account. Key Takeaways Contra asset accounts carry a balance that reduces the value of a corresponding account in the general ledger.Contra assets are credit accounts that carry their own values that when combined with the value of the paired account, informs the balance sheet.Contra assets allow for more granular visibility on the balance sheet by maintaining historical costs and independent values rather than reducing the original account directly.Accountants prefer using contra assets to keep the financial reports clean via a trackable throughline. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. AccountingTools. "Debit and Credit Definition." AccountingTools. "Contra Asset Definition." AccountingTools. "Allowance for Doubtful Accounts Definition." AccountingTools. "Accounting for Obsolete Inventory."