Adding Value as a Financial Leader
Balance the Balance Sheet
Debit versus Credit
Does Your Management Team Understand the Financials?
When examining the term “contra asset account,” look no further than the root of contra to get a vague grasp of the definition. Because contra means “against,” one could quickly conclude that a contra asset account is going to be an account that goes against the regular asset account on the Balance Sheet. But in all actuality, what are contra asset accounts? Quite frankly, the actual definition is not far from this estimate. In a sense, a contra asset account is a negative asset account that detracts from all of the other assets included in the balance sheet. More specifically, record the contra asset as a credit that is supposed to balance out a correlating plant asset. The situations that contra asset accounts appear are the ones dealing with Depreciation, which will be explored below.
Contra Asset Account Example
As mentioned above, the primary situation in which contra asset accounts appear has to do with accumulated depreciation. Therefore, an example of a contra asset account involved with a depreciation situation seems reasonable to observe. Nova Incorporated is attempting to finalize their balance sheet in terms of the net value of their assets. At the end of the year, their assets are as follows… Nova Company valued a van at $30,000, an office building at $500,000 and office equipment at $20,000. At the same time, depreciation for the van at the end of the year ended up at $500. Then the depreciation for the building ended up at $20,000. And the depreciation for the office equipment ended up at $1,000.
Taking into account the list of contra asset accounts, how would you calculate the net value of assets? If the example looks difficult, rest assured the solution is very simple. Because contra assets simply detract from the total value of the asset account, all one has to do is add up all the assets together first. Afterward, add up all the depreciation. Finally, take the total of depreciation and subtract it from total assets. Then you will have the net total value of assets ($528,500). If a ledger were to be observed in this situation, then one would see a balance of three asset debits (van, building, equipment) matched up against three contra asset credits (van, building, equipment).