State BPA Fundamental Accounting Practice Exam

Which type of balance do contra asset accounts normally have?

1. Credit balances

2. Debit balances

3. No balance

4. Zero balance

The correct answer is: Credit balances

Contra asset accounts typically have credit balances. These accounts are used to offset the balances of related asset accounts. For example, the most common contra asset account is Accumulated Depreciation, which reduces the value of fixed assets like buildings or equipment on the balance sheet. When an asset is recorded, it is generally shown at its cost, but as time passes and depreciation is recorded, the accumulated depreciation account will have a credit balance that effectively lowers the carrying amount of the asset. This allows for a more accurate representation of the asset's current value on the financial statements. In contrast, asset accounts themselves usually maintain debit balances since they represent economic resources owned by the entity. Therefore, the functioning of contra asset accounts and their credit balances is integral to achieving a true reflection of asset values in financial reporting.