State BPA Fundamental Accounting Practice Exam

What type of balance do contra asset accounts usually have?

1. Debit balance

2. Credit balance

3. No balance

4. Variable balance

The correct answer is: Credit balance

Contra asset accounts typically have a credit balance. These accounts are used to adjust the value of related asset accounts. For instance, the most common contra asset account is accumulated depreciation, which reduces the book value of fixed assets like buildings and equipment. When an asset is purchased, it is recorded as a debit, which increases its value on the balance sheet. To reflect the wear and tear or reduction in value of that asset over time, accumulated depreciation, which is a credit entry, is used to show that a portion of the asset's value has been consumed. The credit balance in the contra asset account effectively offsets the debit balance in the related asset account, providing a more accurate picture of the asset's net book value on the financial statements. Understanding the role of contra asset accounts is essential in accounting, as they help to present a clearer financial position by showing both the original value of assets and the deductions that apply.