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Meaning of Contra Assets
The word contra means “opposite”. So, contra assets have a credit balance, whereas assets normally have a 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 an asset with the corresponding contra asset will give us the net value of the asset. Contra asset can be referred to as negative asset account.
Examples of Contra Assets
Presentation in the Balance Sheet
|Contra Asset||Presentation in the Balance Sheet|
|Accumulated Amortization||Reduced from the respective Intangible Assets under the head “Non-Current assets”|
|Reserve/Provision for Doubtful Debts||Reduced from Accounts Receivable/Debtors under the head “Current assets”|
|Accumulated Depreciation||Reduced from the respective Tangible Assets under the head “Non-Current assets”|
|Obsolete Inventory Reserve||Reduced 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 presence of the same in the extract of the balance sheet.
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-end||Amortization||Accumulated Amortization||Net Value of Computer Software|
|20×1||200,000||200,000||400,000 (600,000 – 200,000)|
|20×2||200,000||400,000||200,000 (600,000 – 400,000)|
|20×3||200,000||600,000||Nil (600,000 – 600,000)|
The outstanding balance of debtors was 50,000 as of 31/12/20×2. Entity ABC Ltd anticipates doubtful recovery from some debtors on the basis of the previous year’s experiences. Therefore, it decides to provide for a 5% reserve for doubtful debts on its debtors.
–So, 2,500 (50,000*5%) will be reduced from the number 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 the balance sheet as of 31/12/20×2