Which statement best describes a contra asset account?

Which statement best describes a contra asset account?

• A. It records revenue.
• B. It records expenses.
• C. It offsets asset balance.
• D. It increases asset value.

Answer: (C)

The main idea being tested is how a contra asset account functions to reduce the value shown for an asset on the balance sheet. A contra asset account carries the opposite balance of the asset it relates to (it has a credit balance while the asset has a debit balance) and sits alongside the asset to show the net amount. This is why it’s described as offsetting the asset balance. Examples include accumulated depreciation, which reduces the book value of fixed assets, and allowance for doubtful accounts, which reduces accounts receivable. Because of this, contra asset accounts do not record revenue or expenses, and they do not increase asset value; they decrease the net asset amount reported.

The main idea being tested is how a contra asset account functions to reduce the value shown for an asset on the balance sheet. A contra asset account carries the opposite balance of the asset it relates to (it has a credit balance while the asset has a debit balance) and sits alongside the asset to show the net amount. This is why it’s described as offsetting the asset balance. Examples include accumulated depreciation, which reduces the book value of fixed assets, and allowance for doubtful accounts, which reduces accounts receivable. Because of this, contra asset accounts do not record revenue or expenses, and they do not increase asset value; they decrease the net asset amount reported.