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  1. This answer was edited.

    First, let me explain you the meaning of the term Contra Assets. Meaning of Contra Assets The word contra means “opposite”. So, contra assets account have credit balance, whereas assets normally have debit balance. Contra asset is used to offset or reduce the balance of the corresponding asset accouRead more

    First, let me explain you the meaning of the term Contra Assets.

    Meaning of Contra Assets

    The word contra means “opposite”. So, contra assets account have credit balance, whereas assets normally have debit balance.

    Contra asset is used to offset or reduce the balance of the corresponding asset account in the balance sheet. Reducing or offsetting the gross value of asset with the corresponding contra asset will give us the net value of the asset. Contra asset can be referred as negative asset account.

    Examples of Contra Assets

    1. Accumulated Depreciation
    2. Accumulated Amortization
    3. Obsolete Inventory Reserve
    4. Reserve/Provision for Doubtful Debts

    Presentation in the Balance Sheet

    Contra AssetPresentation in the Balance Sheet
    Accumulated AmortizationReduced from the respective Intangible Assets under the head “Non-Current assets”
    Reserve/Provision for Doubtful DebtsReduced from Accounts Receivable/Debtors under the head “Current assets”
    Accumulated DepreciationReduced from the respective Tangible Assets under the head “Non-Current assets”
    Obsolete Inventory ReserveReduced from Inventory under the head “Current assets”

    For better understanding, let me take 2 examples from above – Accumulated Amortization & Reserve/Provision for Doubtful Debts, & demonstrate the presentation of the same in the extract of balance sheet.

    Example 1.

    Suppose ABC Ltd acquires a new computer software for 600,000 in the month of January 20×1. The estimated useful life of the software is 3 years with no scrap value.

    –As per the straight-line method, 200,000 will be written-off/reduced from the amount of computer software each year for 3 consecutive years.

    Year-endAmortizationAccumulated AmortizationNet Value of Computer Software
    20×1200,000200,000400,000 (600,000 – 200,000)
    20×2200,000400,000200,000 (600,000 – 400,000)
    20×3200,000600,000Nil (600,000 – 600,000)

    Example 2.

    The outstanding balance of debtors was 50,000 as on 31/12/20×2. Entity ABC Ltd anticipates doubtful recovery from some debtors on the basis of previous year’s experiences. Therefore, it decides to provide for 5% reserve for doubtful debts on its debtors.

    –So, 2,500 (50,000*5%) will be reduced from the amount of debtors as reserve/provision for doubtful debts as at 31/12/20×2.

    Presentation of Accumulated Amortization & Reserve/Provision for Doubtful Debts in the extract of balance sheet as at 31/12/20×2-

    Contra assets in balance sheet

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